Report: Fed examiners were ‘untimely’ in closing supervisory findings

Andrew Harrer/Bloomberg

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• Key insight: Examiners from the Federal Reserve Board and reserve banks were not timely in closing out supervisory findings after they were addressed by banks. 
• Expert quote:  “Closing findings several months after institutions submit their remediation materials is untimely.” — the Office of Inspector General for the Board of Governors of the Federal Reserve System and Consumer Financial Protection Bureau.
• Forward Look: The report notes that the Fed has already taken several steps to address issues in its large bank oversight group, but it will continue to monitor the space to ensure those reforms have their intended effect.

Large banks had to wait months for their supervisory ratings to be updated after addressing findings from Federal Reserve examiners, the central bank’s internal watchdog found.

A report issued Thursday by the Fed’s Office of Inspector General states that examiners from the Fed’s Large and Foreign Banking Organizations, or LFBO, group would take “several months” to validate remediation efforts by institutions they supervised.

In some cases, remedies would not be finalized in the supervisory record until the bank’s next annual review. Along with frustrating the banks, the report notes that these delays meant significant issues could be left unresolved for extended periods.

“Institutions may be susceptible to elevated risks if supervisory staff do not timely finalize validation of remediation efforts,” the report states. “For example, if supervisory staff do not timely review an institution’s corrective actions and the remediation is incomplete or ineffective, the issue will persist and may worsen.”

Fed examiners can flag safety and soundness issues within banks either as they arise on an idiosyncratic basis or during yearly horizontal reviews, which look at activities across banks of a similar size. Supervisory shortcomings are formally recognized through directives known as matters requiring attention and matters requiring immediate attention, or MRAs and MRIAs, respectively.

These matters are kept confidential, but having outstanding findings on record can have regulatory implications for banks, making it harder for them to open new branches, pursue mergers and acquisitions or engage in new regulated activities.

Individual MRAs and MRIA often come with deadlines for addressing issues, the OIG report notes, but there is no single set timeframe for the Fed to recognize and validate the plans banks put forth to address these issues. In some cases, the agency is supposed to update the status of its findings quarterly, in some cases it is supposed to happen as the status changes, but that can be shaped by the specific citation and plans for redress.

For its probe, the Fed’s OIG reviewed supervisory findings from staff examiners at the Federal Reserve Board in Washington as well as the Federal Reserve Banks of New York, Chicago and Cleveland that were part of the LFBO group — tasked, at the time, with overseeing domestic banks with more than $100 billion in consolidated assets and foreign banks operating in the U.S. 

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Still, the IG report concluded, “closing findings several months after institutions submit their remediation materials is untimely.”

The report pointed to the Fed’s overlapping system of oversight as one area driving up the time of implementation, noting that a finding cannot be closed until a remediation plan is approved by a bank’s dedicated supervisory team, the leadership team of its horizontal review team and its designated horizontal oversight group.

“Interviewees noted that this layered review process can cause delays in verifying an institution’s remediation efforts,” the report states.

The Fed’s inspector general did not recommend any changes to the Fed’s remediation response practices, noting that the central bank has already taken steps to reform its LFBO group as well as its various practices. 

The report noted that several changes implemented by the Fed during the past year, including its new “Statement of Supervisory Operating Principles” issued last October, various rapid response training sessions held throughout the system and a concerted effort to review all outstanding MRAs and MRIAs, are moving things in the right direction. 

Still, the report said, the inspector general will monitor progress on this front to ensure these reforms are having their intended effect.

“Given the changes to the Board’s supervisory approach for validating a financial institution’s examination finding remediation efforts, we will not issue any recommendations to address this finding,” the report concludes. “However, as part of our future project planning activities, we may consider a review to assess the implementation of the Board’s new approach of relying on institutions’ internal audit functions to validate finding remediation.”