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Bank Exams Will Regain Human Touch When Pandemic Recedes

Dec. 8, 2021, 11:00 AM

Federal regulators conducted bank examinations remotely during the pandemic, but both sides are eager to restore the human element of supervision in the post-Covid world.

The agencies that supervise banks—the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency—had been looking to incorporate technologies to review loan data and bank operations even before the pandemic.

Those tools proved vital when Covid-19 forced everyone to hunker down, curtail travel and practice social distancing.

But the pandemic also showed limits to what examiners and the banks they oversee can do without being in the same room, said Christopher Cole, the senior regulatory counsel at the Independent Community Bankers of America. Post-pandemic bank exams will likely follow a hybrid model that values personal interactions while retaining remote technologies.

“There always will be a time when they need to come in, meet one on one with management and senior executives and perhaps even the board,” he said. “I don’t think that there’s any substitute for that.”

Smoother Than Expected

Examinations are a key tool for regulators to make sure financial institutions operate safely and soundly. Bank supervisors can also use exams to flag potential violations, and either fix or refer them to enforcement attorneys.

Prior to the pandemic, community bank examinations required teams of regulators to travel to small towns to review documents and loan files. For the largest banks, examiners had a permanent presence inside the buildings.

Given the long history of on-site supervision—the OCC has been examining banks since it was created during the Civil War—regulators were somewhat skeptical that fully remote exams could replace in-person ones, said Julie A. Hill, a professor at the University of Alabama School of Law and a former banker.

“We all just kind of had to shift, and it wasn’t as bad as we thought or worried about,” Hill said.

For some time, the federal banking regulators have been looking at ways to reduce the time and travel inherent to in-person examinations, FDIC Chairman Jelena McWilliams said during a Nov. 30 press briefing.

That allowed the FDIC, the Fed and the OCC to have data security and other protocols already in place for remote exams when the pandemic hit, without compromising the safety and soundness of banks and the broader financial system, said Doreen Eberley, the FDIC’s director of risk management supervision.

“Thank goodness we started early,” Eberley said.

Digital Divide

The FDIC in August sent out a request for information asking for banks’ feedback about pandemic-era supervision.

Overall, the response has been positive, although there were problems based on bank size and even where they were located, Cole said.

Rural banks in particular ran into problems due to a lack of broadband internet access, which made transferring loan files to examiners difficult, he said.

In some cases, banks had to convert those files into the PDF format, an arduous process that created enormous files, Cole added.

The American Bankers Association said in an October comment letter to the FDIC that its members would like the option to choose between on-site, remote or hybrid exams. Members would prefer “the proper balance of offsite and onsite work dictated by banker and examiner needs and preferences,” it said.

Hybrid Style

Such an approach may be the future of bank examinations.

McWilliams told reporters the FDIC is moving toward a blended approach. The Fed also said in a November report it “intends to adopt” a hybrid supervisory approach.

The OCC said in a Dec. 3 statement that it “better understands the benefits and limitations of offsite examination activities” and will plan exams based on that knowledge.

“While the location of our examination activities may be more flexible going forward, the OCC will continue to have dedicated teams of examiners assigned to supervise the largest and most complex institutions and will execute effective, risk-based supervisory strategies at all OCC-supervised institutions,” the agency said in a statement to Bloomberg Law

Much of the supervisory process can be done without meeting face to face, said Todd Phillips, the director of financial regulation and corporate governance at the Center for American Progress, a progressive think tank.

“I imagine it’ll be a lot of just going through documents off-site. And if they were on-site, they would be going through those documents without talking to people,” Phillips said.

Even with more supervisory work being done off-site, there’s still a need for examiners to go and visit banks to get context about a community and how a bank serves its particular needs, Cole said.

Supervisors are often concerned when a bank’s lending portfolio is heavily concentrated on one particular type of credit, such as commercial real estate or agricultural loans. Having an examiner show up in person can prove that a bank is serving a real community need for credit rather than operating unsafely, Cole said.

“Particularly in some of these smaller communities, it’s good for the examiner to go,” he said.

To contact the reporter on this story: Evan Weinberger in New York at

To contact the editors responsible for this story: Michael Ferullo at; Roger Yu at