Dive Brief:

• A recent report from the Government Accountability Office calls out “weaknesses” in the Federal Reserve’s and Federal Deposit Insurance Corp.’s processes for advancing supervisory concerns.
• The report, issued last month to the Senate Banking Committee, put forth recommendations for changes at each regulator, including a centralized system to track supervisory recommendations at the FDIC.
• The Office of the Comptroller of the Currency, which supervises national banks, generally adheres to its procedures for escalating supervisory concerns to enforcement actions, the GAO report said.

Dive Insight:

The GAO isn’t new to issuing recommendations to the federal banking agencies. But after the failures of Silicon Valley Bank and Signature Bank in March 2023 “raised questions” about bank supervision, the GAO was asked to review regulators’ supervisory practices, as part of a series of reports related to the bank failures. 

The office analyzed data from 2018 to 2022, reviewed exam documents and compared regulators’ communication of supervisory concerns with policies and procedures, the report said. The GAO also conducted interviews with federal bank examiners.

The Federal Reserve’s lack of a regulation or enforceable guidelines on corporate governance and risk management issues — despite having statutory authority to issue such a rule — “may have contributed to delays in taking more forceful action against Silicon Valley Bank,” the report said. “Such authority may assist the Federal Reserve in taking early regulatory actions against unsafe banking practices before they compromise a bank’s capital.”

The GAO also said the Fed has not finalized a Dodd-Frank Act requirement intended to address earlier remediation of bank issues. Fed officials said other rules “accomplish much of what the act intended but acknowledged that substantive items from the act remain unimplemented. 

“By implementing the act’s requirements, the Federal Reserve could align its supervisory tools with congressional intent that it take early action before an institution’s financial condition deteriorates,” the report said. 

The Fed neither agreed nor disagreed with the GAO’s recommendations, the report noted. 

A response letter from the Fed noted the central bank has modified its supervisory processes with the goal of addressing material issues more quickly, and this year had all examiners go through training “on providing proper support for supervisory findings and communicating those findings clearly to bankers.”

FDIC

At the FDIC, the lack of a centralized tracking system for supervisory recommendations limits the agency’s ability to flag emerging risks across supervised banks, the GAO said. 

The FDIC’s existing methods don’t provide managers and staff at headquarters with readily available information on supervisory recommendations. When the GAO requested such data, “FDIC staff had to manually compile and process spreadsheets created by examiners to provide the necessary information,” the report noted.  

The FDIC, in contrast to other regulators, also lacks a formal process ensuring large bank examination teams and relevant stakeholders are consulted before escalation decisions or changes are made, the GAO report said. 

“Examiners from two selected banks cited concerns about managers altering conclusions without consulting the examiners or being unreceptive to divergent views,” the report said. “Procedures, such as vetting meetings, requiring managers to consult with large bank examiners and other stakeholders could ensure decisions are grounded in the evidence gathered during examinations.”

The FDIC also doesn’t require large-bank case managers to rotate after a few years at one bank.

“Implementing rotation requirements could limit close relationships between FDIC large bank case managers and bank management, helping ensure large bank case managers maintain their supervisory independence,” the report said.

The FDIC agreed with the GAO’s first two suggestions. In a response letter, the agency said it’s working to replace older technology for tracking supervisory records and aims to put in place a solution that centralizes supervisory recommendations by June 30, 2025. And it acknowledged that enhancing communication procedures and discussion of exam findings may be beneficial, adding that it expects to formalize a process by that same deadline. 

But the FDIC disagreed with the recommendation on requiring rotations for large-bank case managers, saying the report didn’t offer sufficient support for the recommendation and doesn’t take into account other controls aimed at mitigating risk in this area, including those the GAO noted in a 2020 report. GAO staff “made several changes” to its recent report based on the FDIC’s comments, the FDIC response noted. 

The FDIC response also made a point of noting it supervises more than three times as many banks as the OCC, and more than four times as many as the Fed, and the average size of banks the FDIC supervises is much smaller than those supervised by its fellow agencies. 

The OCC oversees federally chartered national banks and branches or foreign banks; the Fed supervises state-chartered banks and bank holding companies that are members of its system; and the FDIC oversees state-chartered banks that are not members of the Fed system.

Carl Goss, a Dallas-based partner at law firm Hunton Andrews Kurth, said it can take a while for all three regulatory agencies to escalate supervisory concerns. 

Goss, an OCC vet, pointed to other differences among the three agencies: The OCC’s sole job is to examine banks, so it’s easier for that regulator to specialize in that mission, he said. On the other hand, the Fed is tasked with monetary policy, and the FDIC insures deposits, so there’s more room for improvement for those two regulators on the examination side, Goss contended.