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Improving the Examination Experience of State Member Banks

Ninth District Highlights - March 2015

March 6, 2015


Ron J. Feldman Executive Vice President and Senior Policy Advisor
Improving the Examination Experience of State Member Banks

I identified a commitment to continuous improvement as a strength of our supervision of state member banks (SMBs) in the last Banking in the Ninth. I will describe a recent improvement effort in this column. Specifically, we charged a group of experienced staff with suggesting ways to improve the examination experience of SMBs. We identified areas where we can improve our communication and examination management. I will summarize the review itself, lay out the lessons we learned and conclude with next steps.

Review of the SMB examination experience

Some aspects of a bank examination may inherently create challenges for banker-bank supervisor interaction. Examinations can disrupt bank operations, for example. Examination findings can, at times, lead to disagreements. But other aspects of a bank examination may detract from the SMB experience without enhancing supervisory results. We asked a group of seasoned examiners to identify precisely those features of SMB examinations that we can improve without compromising examination effectiveness. The group conducted its own analysis and received feedback from SMBs and examiners. I want to thank participating SMBs for providing candid and very helpful feedback. 

Lessons learned from the review

We learned much from the review, but I will highlight four key lessons learned.

The examination experience for SMBs is generally sound. We certainly have room to improve, but many key features of the examination process are working well. Areas of strength I noted in the last Banking in the Ninth help make the examination experience a generally positive one for SMBs.

The effectiveness of communication often defines the examination experience for SMBs. Feedback suggests that we do not sufficiently explain the examination process. Bankers sometimes need better context for the information we request, to choose one example. Questions that we ask bankers may seem unnecessary, even if not particularly problematic. For example, we may ask if the bank offers a certain product or service, even if the bank historically has not offered it or does not intend to offer it.

I see analogy to a medical checkup. Checkups often start with a confirmation of behaviors that have not changed for many years. Nonetheless, doctor and patient should have a common understanding of the answers to the questions and why the questions should be asked. We need to improve with regard to the latter.

Useful internal Reserve Bank divisions of supervisory work are irrelevant to bankers. We divide examination work to achieve efficiencies and ensure effectiveness. We have separate safety and soundness and consumer examination teams, for example, recognizing the separate supervisory focus of these teams. A banker reasonably sees that both examinations are done by the Federal Reserve and should expect that we share information and understanding of the SMB across internal groups. A banker would expect that information given to one part of our supervisory function flows through to all. Our division of labor does not and should not matter much to banks. We have begun to address this issue through a “one-stop shopping” relationship contact and the use of procedures and technology to facilitate the sharing of information. We must take additional steps to ensure that our internal separation of duties does not diminish the examination experience or the overall relationship.

We must continue to tailor examination interactions for each bank. Bankers reasonably expect examiners to understand local markets and bank strategy within the market, particularly with regard to the products that banks offer to execute that strategy. We have processes and procedures in place to achieve that outcome. Indeed, some examination activities, such as assessing bank performance with regard to the Community Reinvestment Act, require deep local knowledge. We can better integrate our understanding of a bank and its community into all of our supervisory activities.  

Next steps

We received helpful feedback on the many aspects of the examination process that are already effective and thoughtful suggestions for the areas where we can improve. We would like to get more feedback from banks and holding companies we supervise. Please send your feedback on our supervisory process to I view our responsiveness to this feedback as a priority for 2015 and beyond.

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