Bank Exams May Lose Punch as Coronavirus Restrictions Linger

Bank exams could become less effective now that federal financial regulators are steering examiners to work remotely as part of efforts to combat the novel coronavirus.

Regulators like the Office of the Comptroller of the Currency and the National Credit Union Administration have tools to conduct remote examinations of financial institutions rather than conducting on-site reviews of banks’ operations. But those systems weren’t designed to replace on-site inspections entirely, nor were they designed for people being locked in place for an extended, unknown period of time.

As lockdowns and travel restrictions expand, problems at banks could slip through the cracks.

“The global nature of this is so different that it’s creating issues that have never been played out,” said Thomas Munoz, a national bank examiner and former deputy assistant comptroller in the OCC’s Chicago office.

On the Job

The OCC, the NCUA, the Federal Deposit Insurance Corp., and the Consumer Financial Protection Bureau have all told their examiners to work off-site and not visit the financial institutions they oversee.

The CFPB has put a moratorium on in-person exams for two weeks, with the ban lasting from March 16- 27. The FDIC adopted similar restrictions, and NCUA examiners are grounded until at least March 30.

The OCC said its examiners are observing the “health and safety protocols of the institutions they supervise when conducting on-site examinations” and encouraging telework wherever possible.

File Sharing

Bank examiners rely in large part on extensive reviews of electronic files, including documents, recordings of calls, and meetings, said Richard Perr, chairman of Kaufman Dolowich & Voluck’s consumer financial services practice group.

That should continue relatively unimpeded because of efforts to create secure data transfer portals prior to the novel coronavirus crisis, he said. The transfer of some paper documents may be problematic, but shouldn’t be a major issue, Perr said.

Examiners then use the reams of data to get a picture of a bank’s operations, and determine whether there may be any anomalies.

For example, a bank that normally does $10 million in remittances in a quarter may suddenly have $100 million in remittance transfers in that same period. A bank’s examiners would use an in-person meeting to discuss the discrepancy, Munoz said.

That can largely be done over the phone or through video-conferencing, particularly because bank employees may be dispersed and working from home, he said.

But examiners would lose the chance to ask “off-hand” questions that can come up when meeting in person, and can often turn up issues that weren’t at the top of the agenda, Munoz said.

‘No Substitute’

Beyond the “off-hand” questions, on-site bank examiners engage in transaction testing and making sure that policies and procedures that are written down are carried out in day-to day operations, said Julie Hill, a professor at the University of Alabama School of Law and a former banker.

“Stuff like that, there’s really not a substitute for in-person examination,” she said.

Another problem facing examiners: the uncertainty of how long they’ll be outside of the institutions they supervise. Each of the orders to work remotely are for two weeks, but few anticipate the lockdowns lifting by then, especially with local governments ramping up their efforts to get people to stay home.

Banks and credit unions have been told by regulators to work with small business and other customers as the economic toll worsens. That could place extra stress on the banks, and the lack of in-person examinations may add a layer of oversight of the financial system’s health, Perr said.

As that happens, regulators will have to turn their attention to issues like confirming banks are sufficiently liquid to keep lending and survive a downturn, he said.

“In the short term, there’s going to be less of a concern as you deal with the consumer end of it,” Perr said.

When it comes time for liquidity checks, bank examiners working offsite will be at a disadvantage when compared to working inside a bank, as they usually would.

“It’s easier to hide a distressed condition when the examiner is not there looking you in the face,” Hill said.