Trump Bank Exam Changes Leave Some Risks Unwatched, Critics Say

Federal banking regulators want examiners to focus more closely on core financial risks at the institutions they oversee, but doing so may limit their ability to flag money laundering and other potential problems, critics say.

The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency on Oct. 7 proposed a standard definition of what constitutes an “unsafe or unsound” banking practice, zeroing in on risks to banks’ balance sheets and the FDIC’s Deposit Insurance Fund. The Trump administration has honed in on bank examinations as it tries to roll back some rules for big banks and ease federal scrutiny of community and regional lenders.

Also included in the proposal is a limitation on “matters requiring attention”—regulatory red flags that examiners can present to bank executives and boards.

The regulators are looking to curb instances of “mission creep” where examiners use MRAs to notify a bank’s C-suite leaders about issues that don’t warrant such attention, said Michelle Rogers, the chair of Cooley LLP’s financial services enforcement and regulatory practice group.

“We have evolved over the years from a real and true oversight of crucial regulatory concerns to a little bit of a grab bag,” she said.

But tightening the standards for MRAs runs a risk, said Todd Phillips, a professor at Georgia State University’s Robinson College of Business and a former FDIC attorney. Examiners may pay less attention to significant problems—including compliance with federal rules meant to deter money laundering and terrorism financing—simply because they don’t affect a bank’s bottom line.

The examination and MRA process needs an overhaul in some areas, such as eliminating the link between supervision and enforcement, he said.

But closing off examiners’ ability to raise issues doesn’t accomplish that, Phillips said.

“Sweeping things under the rug is not the way to go,” he said.

Trump Rollback

MRAs have become a central part of the administration’s push to ease bank regulations.

Typically, examiners use MRAs to flag a wide array of risks before they become major problems. But the FDIC and OCC’s joint proposal would ensure that examiners issue MRAs only when a lender’s practice actually violates a banking-related law or presents a material financial risk to the company.

MRAs aren’t binding, though bank boards and executives frequently interpret them that way. Unresolved MRAs can affect how examiners rate banks’ health.

Providing a uniform standard for what constitutes an unsafe or unsound practice—previously more a term of art—and for bringing MRAs would give banks “greater clarity and certainty,” acting FDIC Chairman Travis Hill said at an open meeting this week where the proposal was released. Trump has tapped Hill to serve as the banking regulator’s full-time chief.

The proposed changes “should help to refocus the examination process on material financial risks,” Greg Baer, the president and CEO of the Bank Policy Institute, a trade group for the largest banks, said in a statement after the proposal’s release.

Opponents say the FDIC and OCC are putting blindfolds on examiners, stopping them from identifying and addressing issues that won’t immediately hurt a bank’s balance sheet.

“Unethical and risky activities that do not directly affect a bank’s bottom line can and do lead to significant losses, bank failures, taxpayer-funded bailouts, and economic instability,” Dennis Kelleher, the president and CEO of Better Markets, a group advocating tighter financial regulations, said in a statement.

Examiner Attention

The proposal would still allow FDIC and OCC examiners to identify issues that might eventually lead to financial risks, such as insufficient cybersecurity protocols and other operational controls, as well as violations of laws that the banking agencies enforce.

That should address anti-money laundering concerns and other significant issues, Rogers said.

The problem is more likely to be one of examiner attention, said Madhu Nadig, the founder and chief technology officer at Flagright, an artificial intelligence transaction-monitoring company.

Examiners may be less inclined to look for issues that fall outside their agencies’ stated priorities, and bank compliance officers may have a hard time convincing their bosses to address those problems, he said.

“They’re not going to get the support from management because the presumed risk has reduced on the regulatory side,” Nadig said.

That concern may be overplayed, Rogers said.

“I don’t have any client that has said the examiners aren’t worried about this so we should ease off,” she said.