Read Between the Lines

Each month Bank Insights reviews news from regulators and others to give perspective on regulatory challenges.

Fed Experiments with Off-Site Loan Review

The Federal Reserve is reviewing a pilot program that cut in half the on-site exam time for community banks by allowing examiners to look at loan documents off-site. The banks that participated in the experiment gave examiners secure access to loan portfolio information and the actual electronic loan documents needed for a credit review, the Fed reveals in this quarter’s Community Banking Connections. There were technical issues with the quality of some images of loan documents, and some bankers were concerned about their inability to share insights with examiners about asset classifications. The Fed said it plans to institute off-site credit review to interested banks in the future, saying “the effective use of technology can be a key tool to enhance the bank examination process.” The FDIC has for years used an off-site rating tool (a statistical model known as SCOR that predicts the probability of a CAMELS downgrade) as an early-warning system for troubled banks.

Fed Reviewing Community Bank Supervision

The Federal Reserve is conducting a “zero-based review” of its community bank supervision program, and will likely eliminate some guidance and revise others, according to the main article in the latest issue of the Fed’s Community Banking Connections.

The article, “Board Staff Perspective on Community Bank Supervision: One Size Doesn’t Fit All,” emphasizes that the Fed treats community banks differently than larger banks. It says that Washington is “mindful” of community bank concerns that large bank requirements are often viewed as best practices that trickle down to community banks “in a way that is inappropriate.”

Regulators Outline HELOC Challenges

Regulators have issued guidance to banks to deal with the impending wave of home equity lines of credit that are reaching their end-of-draw periods. The guidance recommends that banks begin conversations with borrowers about what will happen when their loans reset or reach maturity.

It encourages banks to work together with borrowers to avoid defaults and gives tips on how to manage potential exposures and risks.

How to Set the Tone for Effective Cyber Risk Management

Build a security culture from the top to make sure your bank is timely monitoring cyber risks, according to a recent community bank presentation from the FFIEC. Management must identify, measure, mitigate and monitor risks; develop plans according to the bank’s risk and complexity; make sure that the bank’s IT strategy is aligned with its business strategy, and get regular metrics on its vulnerabilities. Questions to ask: How does the bank test its plans to respond to a cyber-attack and do those tests include key internal and external stakeholders?

About 500 community banks will undergo cybersecurity assessments as part of their regular exams under a new FFIEC pilot. Regulators will use the information from the assessments to assess how banks are managing cybersecurity and whether they are prepared to mitigate increasing risks. The FFIEC has also published a webpage about cybersecurity issues.

Which Regulations Are Unnecessary or Too Much of a Burden?

Every 10 years, the Fed, the OCC and the FDIC review their regulations to identify those that are outdated, unnecessary or “unduly burdensome.” Now is your chance to chime in with what you think. Comments can be submitted to the agencies’ website. Jay Messenger, president of Muleshoe State Bank in Muleshoe, Tex., for instance, says it takes too much time for both the bank and its holding company to prepare and process the FRY-8 document.

More Time for Stress Testing

All the prudential regulators want to shift back the timing of the annual stress testing cycle by 90 days. The largest banks that are mandated to conduct stress tests would also not have to calculate their capital ratios using the Basel III advanced approaches until Jan. 1, 2016.