Why
don’t the Regulators Just Understand?
To
paraphrase the great Will Smith, actor and rapper extraordinaire- sometimes it
just seems like “regulators just don’t understand”! Have you ever felt like you
were being singled out during an examination? You are most
certainly not alone! Despite the fact that it seems like the examiners
often don’t understand the fact that banks are for-profit organizations,
there is hope. You would be amazed by how much a few conversation with
your regulator might change things. As
with many things, a journey towards self- knowledge and self-discovery can lead
to enlightenment!
“They just don’t like us-(or
the Examiner had his own agenda)”
It
can often seem like from the very moment the examiners come in the door they have
very specific things they are looking for and this in fact is the case! Examiners use a specific set of metrics and
rules as they put together the scope for the examination of your bank. The really good news here is that these
metrics are not a company secret. In
fact, regardless of who your regulator might be, the examination manual, which
directs the development of the scope of the examination is public
information. All regulators use a form
of risk based examination these days. The scope of the examination will be based
upon several factors including:
·
past
performance
·
type
of products offered
·
changes
in management
·
changes
in the banking environment
·
changes
in regulations
This,
of course, is not a complete list, but it covers the basics. The point is that the examiners will develop
a scope for the examination based upon a known set of variables. There is no secret to this and it is simply
not the case that they just don’t like your bank.
They don’t understand that
banks have to make money to live
Again,
it can seem that every year brings more and more regulation. In fact, there were more than 80 regulations
that were implemented in 2014 alone! The
idea that a bank has to make a profit to keep its doors open can sometime seem overwhelmed
by the need to comply with regulations.
However, there is an inconvenient truth in the life of a regulatory
agency; without institutions to regulate, the need to exist ceases. The Office of Thrift Supervision serves as a
poignant example. Regulators are interested
in keeping strong banks that have a good compliance record alive and
thriving.
The
fact of the matter is that there are no consumer banking regulations that have
not been well earned. A review of the
history of some of the seminal consumer banking regulations provides us with a
history of bad behavior that cried out for regulation.
For example:
(1) The truth in lending act was passed in
response to the growing number of Americans who were getting credit, but not
being properly informed of the cost[1]
(2) Regulation
B was passed as a direct result of discriminatory lending behavior on the part
of banks. (3)The SAFE ACT which requires
loan officers to register and be part of a national data base, is the direct
result of the financial meltdown of 2009.
Notably,
consumer regulations are a part of the history of banking in the United State
and are woven into the fabric of the business of banking.
The regulators are just out
to get us!
There
are many reasons why a community bank, in particular, might feel this way. Quite often the bad behavior discussed above
was actually conducted by the much larger brethren of community banks. Despite this fact, the community banks are
painted with the same broad brush and held to the same standard as the giant
miscreants. There have been many commentaries
questioning whether regulatory agencies simply want to do away with community
banks. We believe that this is far from
the case. There is and will always be a
significant market in which community banks can grow and prosper. Regulators have recognized the need for a
different set of standards and regulations for community banks for some
time. Political considerations and
logistics have stymied the effort to date, but the drive continues for a
separate set of regulatory standards for community banks.
How can I get them to
understand us?
Far
too often the only communication between banks and their regulators is through
the examination process. As many banks
have discovered, this is not the optimal time to discuss hot topics in
regulation! Examiners are on a tight
time schedule and generally must answer to supervisors at their regional
office. The job is to gather the
information pertinent to the scope, analysis the information and communicate
areas of concern. In this environment,
the examiners rarely have the time or the resources to discuss ideas about how
to enhance the overall compliance program.
One
way to greatly improve the overall examination experience is to develop an
ongoing relationship with the regulatory office that is assigned to your
bank. It may seem unnatural to talk
with the very organization that “torments” you, but ongoing communication can
easily become a two way street. Examiners
who feel that they have good communication with a bank will be forthcoming with
information about changes in regulations.
More importantly, information about changes in regulatory approach can
be communicated. This can invaluable
information.
A
long standing, but not very well understood axiom is
“self-detected/self-corrected”. Banks
that make a point of finding a compliance issue, correcting the problem and
then reporting it to the regulators, get way more than a mere “gold star”. Again, even though it may seem
counter-intuitive, but making a practice of reporting issues that you have
found and corrected goes a long way toward building credibility and understanding
with your regulator.
So
in the end, it is not so much that regulators just don’t understand. It is more
the case that you have help them understand.
No comments:
Post a Comment