With the prospect of a downturn in the economy getting ever so closer, the time is proper for executive control teams and boards of administrators of financial institutions to study and re-evaluate how they may be going to prepare for and respond to regulatory examination criticisms, whether or not that be within the shape of topics requiring interest, board resolutions, memorandums of expertise, or quit and desist orders. While the listing beneath is never exhaustive, it must serve as a beneficial manual for banks to continue productive dating with their regulatory companions.
A. Prepare, Prepare, Prepare
Most economic establishments recognize (or ought to understand) their stress points previous to a regulatory examination. Maybe it is an overconcentration in a specific vicinity of the loan portfolio, failure to have an ok government succession plan in the area, or inadequate internal sources to address operational integration following a current acquisition. You ought to always expect that your regulators may also recognize these concerns throughout an examination. Accordingly, management ought to be forthright with their boards of administrators and talk actually. Hence, there is no “surprise” element for the duration of the direction of the exam or in that first exit interview. Similarly, those key areas of discussion must be memorialized in board minutes. Certainly, the excellent course is always to rectify issues before an examination; sadly, that isn’t always usually viable or always appropriate, relying on a financial institution’s danger profile.
Not having a management succession plan in location is a very one-of-a-kind grievance from having a higher than average concentration in your production loan portfolio whilst your team has a complete understanding of the related dangers of such concentration. It has implemented underwriting strategies to mitigate that chance. To the extent control can display to the regulators that they have organized for those expected exam criticisms, have actively engaged on the problems with the board, and are organized to address the criticisms, regulators will usually method such issues with a “softer” touch whilst preparing their examination findings.
B. Board Engagement
Regulators need to peer an actively engaged board of administrators with appreciation to all material examination findings. Regulators enhance a “red flag” internally when a board is some distance too deferential to its management team. The closing duty for the safety and soundness of an economic organization rests with the board. The board must constructively and actively have interact with management and the regulatory examiners on all key examination findings. Board individuals might also need to have one or two fundamental spokespersons—perhaps the chair of the board or the top of the audit committee, to the extent regulators are targeted on a specific monetary thing of a financial institution’s circumstance—but all board members should understand the problems to hand, actively speak with the regulators and be organized to be leaders inside the agency to cope with exam findings. If a board does now not seem engaged, regulators will be very secure (and brief) in downgrading management in an exam.
C. Negotiating the Findings During the Exam and within the Exit Interview
Being prepared and having an actively engaged management group and the board can be a powerful tool for negotiating an examination finding all through the path of an examination or in and go out of the interview. In precise, board-degree engagement and commitment can cause a suggestion for a fixed of board resolutions rather than the harsher memorandum of knowledge. Examiners will make an initial determination approximately an encouraged finding and come into a go-out interview with their speakme factors and expected resolution protocol. Even so, examiners can be convinced that control and the board have taken a topic so significantly that the answers may be efficiently addressed with endured board and control dedication through board resolutions or only a rely upon requiring interest. In unique, an institution’s verified history of correctly addressing examination criticisms, whether or not or no longer regulators previously identified the same location of the situation in a previous exam, and a group’s commitment to dedicate the time and resources vital for resolution are all factors which could mitigate the level of predicted penalty. Continue to constructively interact with your regulators previous to the shipping of the final exam document, as regulators have more flexibility previous to their commitment on the very last examination text.
D. Negotiating the Penalty
Not each effort to negotiate an examination complaint could be a hit, and banks have acquired, and could hold to get hold of, board resolutions, memorandums of expertise, and cease and desist orders. Typically, the proposed text of an enforcement action might be presented to management and the board for signature using all board individuals. Receipt of the enforcement movement needs to no longer but be the final possibility to interact with your regulators. The phrases and language of an enforcement action may be negotiated, with the quantity of the negotiation generally revolving around the timing to satisfy numerous necessities and focusing the language in particular on the examination criticism (rather than overarching duties to accurate every conceivable violation feasible). In the negotiation, control and the board ought to be very clean with the regulators. They recognize the severity of the difficulty warranting the criticism and are deeply centered and working on an expedited decision.
Management must also engage with their regulators between obligatory reporting cycles to apprise them of the continuing development they are making (and capacity demanding situations they’re facing). In particular, previous to the subsequent examination, control needs to be actively engaged and organized to demonstrate complete decision, so there is no further grievance or, ways worse, an escalation of the criticism to the following level (i.E., from a memorandum of understanding to a give up and desist order). Working with outside advisors in areas of want can assist in facilitating an effective resolution system. However, each control and the board must well be known and receive that the obligation for the safety and soundness of the institution rests with control and the board, now not an outside consultant or marketing consultant.
E. Disagreement With the Conclusions
It is not uncommon for control and the board to disagree with regulatory findings. Boards will frequently weigh their level of the war of words with the endorsed regulatory path of movement. Needless to say, any war of words must always be conveyed respectfully and thoughtfully. Regulators recognize you are not continually going to accept as true with them on their findings. However, they also take into account how institutions behave both in good times and demanding times. If you want to appeal a regulatory finding formally, paintings intently with your advisors and your nearby supervisory director, take benefit of the regulatory ombudsman that corporations have to remedy disputes, and get yourself up to speed with the enchantment method.
The manner of behavior and approach to the appealing technique (although infrequent) may not affect the last decision. However, it can touch destiny examinations if the appeal is conducted with thorough instruction, in true religion, and with zealous but respectful advocacy. If you are not a success in the appeals method, solve the problem and circulate on. You will see that regulator again in the subsequent examination cycle, and you want to start with a smooth slate. Finally, don’t permit your subsequent examination to be the primary time you again interact with the regulatory organization. Pick up the cellphone each quarter—allow your case manager and nearby director to understand what is going on with the financial institution and, most of all, continue to be engaged with the regulatory team. Behind each regulatory agency (and each financial institution) are humans with institutional reminiscences.