The Bank Safety and Soundness Advisor asked its readers what problem issues are overrated for community banking in 2012. They listed the top five including this one that appears to be feedback from an examiner:
Regulatory exam inconsistencies. “While this situation does exist, it’s a cop-out challenge,” another reader says. “The findings that regulators identify are real and we don't hear anyone challenging these findings. What we do hear is that [the regulators] ‘did not cite us for this last time’ or ‘they did not cite the bank down the street for doing the same thing.’ So banks need to quit whining, run their businesses effectively, step up to the plate and make the changes and adjustments needed (including cleaning house of the deadwood executives who are unable to lead change) and increase focus on compliance and risk management.”
It sure sounds like this examiner (“what we do hear…”) is talking about large banks and not small community banks. An overwhelming number of small community banks do run their businesses effectively (oh and BTW, let’s not forget that they are businesses). As far as interest rate risk measurement is concerned I have to take issue with, “findings that regulators identify are real…” Many examples of real findings and adjustments identified by regulators hardly seem valuable. Here are some examples of real findings by regulators for several of our community bank clients over the past year. These were communicated in their written exam report:
- “The bank should also run interest rate risk stress-tests covering longer time frames (possibly three or five years).”
- “Interest rate risk stress tests should cover up to and including +/-500bp shocks.” I’ve also seen +/-600bp suggested.
- “The bank does not have policy limits set for Net Interest Earnings at Risk for a +400bp shock.”
- “Per the guidelines on Model Validation, the bank should have a 3rd party review the findings of the independent audit…” That’s right - they want a 3rd party review of the 3rd party review.
In my opinion while these findings are “real” they are not realistic. Addressing these issues may provide some analytical or academic value, but it will not provide any practical value. It amounts to busy-work. The examiners will check it off their list and the bankers will ignore the results. What a waste of time and energy.