By Pete Schroeder and Michelle Price
WASHINGTON, May 26 (Reuters) – Republican President Trump’s regulators are undertaking the biggest overhaul of bank supervision since the 2008 financial crisis. They say examiners have become too preoccupied with processes and pursuing minor issues, and should focus on core financial risks. Critics say that, together, the changes will weaken the financial system. Here are some of the key changes.
REFOCUSING SUPERVISION ON ‘MATERIAL’ RISKS
The Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) have together raised the threshold for supervisory findings by focusing examiners on “material financial risks,” as opposed to paperwork and process issues that do not pose immediate hazards to a lender’s safety and soundness.
As part of that shift, the regulators have stopped policing reputational risk, a metric which banks had long complained gave examiners too much leeway to ding them on subjective grounds. Trump has also personally complained that banks have hidden behind reputational risk management to deny services to conservatives, claims they deny.
Critics say the changes have weakened examiners’ powers to police problems that do not inherently amount to material financial risks, but which may eventually lead to problems – such as control lapses, governance or other process issues.
RESTRICTING THE USE OF ‘MRA’ NOTICES
To ensure examiners focus on material risks, the agencies have restricted the use of “matters requiring attention (MRAs),” confidential directives requiring lenders to fix issues or face a potential enforcement action.
For over a decade, MRAs have been examiners’ primary tool for policing lenders, but banks say they are frequently used for minor issues. Examiners may now only issue MRAs for material financial risks. For other issues, they can issue so-called nonbinding “observations,” the agencies have said.
If a bank proactively identifies a problem that would normally have triggered an MRA and begins fixing it, bank examiners have been directed to issue an observation.
The OCC and FDIC have also proposed rules that would narrow the definition of “unsafe and unsound” practices that should be policed by examiners.
REDUCING OVERLAPS, LEANING ON BANKS’ INTERNAL AUDIT
The bank regulators have directed examiners to more closely coordinate with each other to minimize duplicative work. The Fed has told staff to rely to the “fullest extent possible” on examination work by other agencies when they are the lender’s primary watchdog, and to conduct their own examinations only when it is not “reasonably possible” to rely on someone else’s work.
Similarly, the Fed has told examiners that so long as a bank’s internal audit function is sufficient, they should rely on those auditors’ findings to determine if a problem has been remediated, rather than conducting their own analysis.
CONFIDENTIAL RATINGS
All three agencies are also overhauling the private ratings system examiners use to grade banks, in which lenders with poor grades can face penalties or business restrictions. The so-called “CAMELS” rating evaluates banks on a host of factors, but the industry has complained the framework can be overly subjective. Regulators have proposed updating those metrics to reemphasize factors around financial risk, and deemphasize what banks say are more nebulous factors such as how well a bank is managed.
CHANGING THE APPEALS PROCESS
The FDIC and OCC are overhauling their process for reviewing bank appeals of issues such as MRAs, regulatory ratings, and other issues to make them more structured, independent and transparent, according to the agencies. Banks say the current appeals process is too opaque, with too much involvement by examiners who made the original decision. Both agencies have created new, independent bodies to adjudicate disputes.
At the Fed, banks have been told that if they believe their examiners are not adhering to the new standards, they should report that to senior Fed staff.
LIMITING HORIZONTAL REVIEWS, EXAM INTENSITY
Another supervisory tool on the outs is a so-called “horizontal review,” when bank examiners probe a group of similar lenders on the same issue. Banks had long complained that such reviews can amount to fishing expeditions, as examiners look for problems unprompted. The new Fed principles direct staff to halt horizontal reviews of large banks unless deemed critically necessary by Fed leadership.
(Reporting by Michelle PriceEditing by Nick Zieminski)
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