Supervisory Environment

Position

• While liquidity, CRE concentrations and uninsured deposits are important areas for examiners to review, ICBA is concerned that examiners are placing too much emphasis on liquidity following the failures of Silicon Valley Bank and Signature Bank and are unreasonably downgrading community banks (particularly those banks with significant unrealized losses) even when they have access to secondary sources of liquidity.
• Community banks are concerned certain restrictions or practices that apply to the largest banks will trickle 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 and non-bank financial institutions due to inconsistent or non-existent 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.
• ICBA opposes the FDIC’s proposal to establish corporate governance standards for all FDIC- supervised institutions with assets of $10 billion or more. The proposal would impose heightened requirements for board members and increase the potential liability of bank directors and officers, making it harder for community banks to attract qualified directors and employees.
• ICBA supports regulation that would limit the use of Matters Requiring Attention (MRAs) to violations of law, regulation, or material safety and soundness issues.

Background

Community Bank Supervision. ICBA opposes a counterproductive, adversarial approach to examination and supervision, in which community banks are exposed to legal and compliance risk for minor, inadvertent calculations or documentation errors.

Not every minor suggestion made during an exam should be formally recorded as a “Matter Requiring Attention.” Instead, these should be limited to violations of law, regulation, or material safety and soundness concerns. 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. This is particularly true when examiners are reviewing community banks for liquidity and CRE concentrations.

Applying “Best Practices” to Community Banks. 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 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.

Corporate Governance Standards. The FDIC is proposing corporate governance standards for all FDIC-supervised banks with assets of $10 billion or more. The proposal is being advanced as “guidelines” that have the practical effect of imposing requirements on bank boards, senior management, business and front- line units, independent risk management and internal audit functions. Some aspects of the proposal are inconsistent with state corporate law. The rigid requirements would make it hard to attract board members and officers and could contradict governing state corporate law.