Bank and Credit Union Executives Express Concerns over Examinations and Regulations

Members of the Federal Reserve’s Community Depository Institutions Advisory Council (CDIAC) raised concerns about compliance examination processes and the current regulatory landscape in a recent meeting, according to minutes released on Friday by the Fed.

CDIAC members are selected from representatives of banks, thrift institutions, and credit unions serving on newly created local advisory councils at the twelve Federal Reserve Banks. One member of each of the Reserve Bank councils is selected to serve on the CDIAC, which meets twice a year with the Board of Governors in Washington.

“The council is very concerned that the working partnership that has existed for many years between examiners and bankers and credit unions is no longer working well, as manifested by increased examination timeframes, less risky concerns being mentioned as matters requiring attention or documents of resolution, and a lack of exam focus on an institution’s overall risk profile,” the group said.

CDIAC members noted heightened concerns over examination activities related to fair lending, Bank Secrecy Act (BSA), cybersecurity, and vendor management. For example, fair lending exams "seem to continue indefinitely, as if examiners must continue to review until they find a problem."

CDIAC members expressed frustration that agencies are using opaque statistical analyses, but are not willing to share their methodologies with financial institutions. CDIAC members stated: "Being able to use the same tools as examiners would help ensure compliance on their own part and would provide examiners with sound, reliable data analysis, thereby reducing examination burden and allowing examiners to focus on higher-risk areas."

Council members said they observed regulatory expectations for large institutions “trickling down” to community institutions, and they emphasized the need for regulators to tailor examinations based on the risk profiles of individual financial institutions.

They also raised concerns about the reduction in the overall level of examiner experience and expertise, noting that less-experienced examiners tended to take a “check-the-box” approach when conducting an examination, rather than focusing on the bank’s risk profile.

Read questions 4 and 5 of the CDIAC minutes.