ICBA Policy Resolution: Supervisory Environment

Position

  • ICBA will continue to warn regulators about overly conservative safety and soundness and compliance exams and the general “gotcha” mentality of examiners. In compliance examination, a more flexible regulatory approach to community banking is needed.
  • ICBA will resist efforts by the regulators to impose hard concentration limits on any type of lending.
  • Community banks are concerned that certain restrictions or practices that apply to the largest banks will come down to their level as “best practices.”  Examiners should not apply large bank practices to community banks that operate according to a different, less complex, and more conservative business model.
  • ICBA opposes a supervisory process that places community banks at a competitive disadvantage to larger institutions due to inconsistent oversight.
  • ICBA supports legislation that would reform the appellate process for agency decisions or actions and allow bankers to appeal to an independent council or ombudsman office an adverse determination made by an examiner in an exam report. 

Background

Community Banks and Zealous Examiner

ICBA strongly advocates for an environment where regulators and financial institutions work together to help consumers and small businesses have access to financial products and services. An atmosphere of “gotcha” examination and supervision, where community banks are exposed to legal and compliance risk for minor, inadvertent calculations or documentation errors, is inappropriate and counterproductive. There should be latitude for informal dialogue. Not every minor suggestion made during an exam should be formally recorded as a “Matter Requiring Attention.” Examiners should use reasonable judgement and respect in the conduct of exams. A more flexible approach would allow for less guarded interactions and a more productive partnership between bank management and examiners. Additional concerns include:

  • Compliance exams have broadened in scope and a wide range of loans and disclosures have become subject to scrutiny under fair lending, Unfair, Deceptive, or Abusive Acts and Practices (UDAAP) and the Truth-in-Lending Act.
  • Regulatory agreements that limit a bank’s ability to declare dividends harm shareholders and make it more difficult for the bank to raise capital.
  • Hard concentration limits on any type of lending, including commercial real estate (CRE), agricultural, or residential mortgage lending will reduce credit availability and harm economic growth.

Applying “Best Practices” to Community Banks

Community banks are concerned that certain restrictions or practices that apply to the largest banks will come down to their level through the examination process as encouraged or expected “best practices.” Examiners should not apply large bank practices to community banks that have a different, less complex and more conservative business model. Examiners also should not criticize community banks in their final written examination reports for not complying with “best practices” unless the criticism involves a violation of bank policy or regulation. Industry “best practices” should be transparent enough and sufficiently known throughout the industry before they are cited in an examination report.

Exam Appeals

ICBA supports legislation that would reform the procedure for seeking review of an agency decision or action resulting from an exam, including classification of a loan, an exam rating, or the adequacy of loan loss reserve provision. Currently, bankers can seek review of these actions or decisions within the agency internally or through its ombudsman’s office. However, these appeals are usually not successful. Furthermore, community bankers often choose not to appeal out of fear of retaliation. ICBA supports legislation that would allow bankers to appeal to an independent council or ombudsman office that would prohibit any sort of retaliation against the bank for exercising its right of appeal.

FDIC Overreach Against Directors and Officers of Failed Banks

ICBA believes that in some cases the FDIC is overreaching in its lawsuits against directors and officers of failed banks.

State business judgment rules should protect the decisions made by officers and directors in the ordinary course of business, including lending decisions. Officers and directors should only be liable in cases of gross negligence or fraud. Aggressive FDIC lawsuits against directors and officers of failed banks exacerbate the challenge of recruiting and retaining community bank directors and officers.

Staff Contact: Chris Cole