June 24, 2023 / VOLUME NO. 267

Expect Examiner Escalation

The banking industry is waiting to see what new policies and rules lawmakers and regulators propose and pass in the wake of the three large bank failures this spring. But there’s one response that banks should expect now that requires almost no sign off, comment period or debate: examiner escalation.

Various postmortems on the failures found flaws in regulatory responses. “In the [five] years prior to 2023, regulators identified concerns with Silicon Valley Bank and Signature Bank, but … did not escalate supervisory actions in time to prevent the failures,” the Government Accountability Office wrote in its April report. The reports on Silicon Valley and Signature included examples where examiners correctly identified an issue or risk that threatened the institution’s safety but didn’t escalate it in a timely fashion. 

For example, the Federal Reserve wrote in its report: “During the second half of 2022 and into 2023, as [Silicon Valley’s] liquidity steadily weakened, unrealized losses accumulated on its securities portfolios, and its performance outlook deteriorated, supervisors continued to accumulate evidence of widespread weaknesses and delayed escalating supervisory action.” 

And the Federal Deposit Insurance Corp. wrote: “In retrospect, [the agency] could have escalated supervisory actions sooner” against Signature Bank. 

In response to these oversights, banks should now expect “stricter enforcement of existing regulations” from examiners during their next exam, said Brandon Koeser, financial services senior analyst at RSM US during Bank Director’s Bank Audit & Risk Conference. Examiners have “a lot of latitude and leeway” under the existing regulatory framework and don’t “need to enact a new regulation to be more strict and more forceful,” he added.

His firm is expecting exam time frames and team sizes to increase. One banker he talked to said his institution's exam went from four weeks to six and there were 20% more examiners on-site, taking a deep dive into the bank’s liquidity plan and profile. 

Examiners are under scrutiny for their failure to appropriately escalate the increasing risks at these three institutions. That means their supervised banks can expect to be under more scrutiny as well. 

• Kiah Lau Haslett, managing editor of Bank Director

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