Examination And Enforcement Outline

Examination and Enforcement

1. Monitoring

   1. The Supervisory System

      1. Rules re examinations

         • Each federal banking agency examines those entities for which it is the primary regulator

           • BUT the FDIC may examine any FDIC-insured institution if the FDIC's board of directors finds that the examination is necessary to ascertain the bank's condition "for insurance purposes." 12 U.S.C. § 1820(b)(3).

           • BUT the Federal Reserve may examine national, all of which are members of the Federal Reserve System. 12 U.S.C. § 248(a)(1).

           • In practice, comity generally means that only the primary regulator does the examinations, with the FDIC generally only examining troubled banks and the Federal Reserve going into national banks only as holding company regulator or discount-window lender

         • Every federal banking agency, when examining a bank for which it is the primary federal regulator, has long held authority to examine any affiliate of that bank insofar as is necessary to disclose the bank's relationship to, and transactions with, the affiliate. 12 U.S.C. §§ 338, 481, 1464(d)(1)(B)(i), 1820(b)(4)(A).

           • To examine such an affiliate, a banking agency must have reasonable cause to believe that the affiliate poses a material risk to an affiliated insured bank or is violating a law that the agency has "specific jurisdiction" to enforce. See 12 U.S.C. §§ 1831v, 1844(c)(2).

         • Congress in 1978 established the Federal Financial Institution Examination Council (FFIEC) to facilitate greater coordination and consistency between agencies. 12 U.S.C. §§ 3301-3308.

           • The FFIEC statute requires member agencies to "establish uniform principles and standards and report forms for the examination of financial institutions." 12 U.S.C. § 3305(a).

           • State depository institution regulators participate through FFIEC's five-member State Liaison Committee.

         • Congress also requires banking agencies to work jointly to eliminate duplicative information requests and coordinate examinations and requests for information among themselves and with state bank supervisors. 12 U.S.C. §§ 1820(d)(6), 4804.

         • Examination reports and examiners' workpapers remain confidential.

           • The government need never disclose them under the Freedom of Information Act. 5 U.S.C. § 552(b)(8).

           • In civil litigation, they enjoy a qualified privilege: courts rarely compel disclosure, and then only after (1) giving the agency an opportunity to object; (2) finding that the need for disclosure (e.g., to do justice between the litigants) outweighs the need for confidentiality (e.g., the potential for chilling candid future comments by examiners); and (3) issuing a protective order limiting access to and use of the information.

      2. Forms of Supervision

         • Off-Site Monitoring

           • As a part of the Supervisory process, banks report extensive data to their regulators, and regulators access banks' condition and prospects both by analyzing that data

         • On-Site Examination

           • Under the Federal Deposit Insurance Act, the primary federal regulator of each FDIC-insured depository institution must generally "conduct a full-scope on site examination" of the bank every year. 12 U.S.C. § 1820(d).

             • BUT in the case of healthy banks with less than $250 million in assets, examinations can occur 18 months apart.

             • In the case of state-chartered banks, federal examination can alternate with state examinations.

             • Agencies can and do conduct more frequent examinations of troubled banks or others identified as being in questionable financial condition.

         • Other forms of On-Site Presence

           • Specialized Examinations

             • Focuses on trust departments, electronic data processing, and compliance with consumer protection laws and the Community Reinvestment Act

           • Resident Examiners

             • Agencies assign to the largest banks - those large enough to warrant year round on-site scrutiny

               • These examiners typically have offices in the bank itself

                 • BUT may be captured by institution (think culture)

           • Visitations

             • Small-scale examinations targeted for specific or limited purposes

           • Inspections

             • On-site visits of Bank Holding Companies by the Federal Reserve

               • The use of the term "inspections" arose to side-step a statutory requirement that the Fed charge holding companies for examinations

         • Call Reports

           • Banks must file quarterly reports of condition, known as Call Reports, containing detailed balance sheet data

             • Large banks must also file reports of income quarterly; small banks, semiannually

             • Agencies analyze these reports by computer and give a bank special scrutiny if computer analysis of the data points to potential problems

      3. CAMELS Rating System

         • To evaluate a bank's financial soundness, examiners use the Uniform Financial Institutions Rating System, commonly called the CAMELS system

         • The examiner makes a qualitative judgment about each of the six components and each component's interrelationship with the other components in order to "identify, measure, monitor, and control" the risks faced by the bank.

         • The examiner assigns a number to each component (1-5):

           • 1 = Strong

           • 2 = Satisfactory

           • 3 = Less than Satisfactory

           • 4 = Deficient

           • 5 = Critically Deficient

         • SIX COMPONENTS:

           • (1) Capital Adequacy

             • In evaluating capital adequacy, examiners assess (1) the extent to which the bank has capital commensurate with the risks it faces and (2) management's ability to "identify, measure, monitor, and control" those risks.

               • Examiners consider the bank's loan-loss reserves, access to capital, and plans and prospects for growth

               • Even though a bank complies with all capital standards, it will not necessarily receive a satisfactory capital adequacy rating; required capital levels represent minimums, not norms for sound banking

           • (2) Asset Quality

             • Denotes the soundness of a bank's assets and off-balance sheet transactions - all viewed in light of management's ability to "identify, measure, monitor, and control credit risk."

               • Stated negatively, "asset quality" refers to existing and potential credit risk associated...

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