4.  We received many comments relating to the burden associated with compliance and CRA examinations.

5.  Safety and Soundness, Compliance, and Information Technology examinations should be done concurrently so that the need to provide the same information multiple times can be lessened.

6.  Special Authority - As the insuring agency, the FDIC needs to know first-hand what is going on in problem and large institutions, regardless of charter. Perhaps the FDIC should be examining national banks on an alternate basis.

7.  The OCC has made public comments about the examination fee disparity between national and state-chartered banks. The respondent indicates a former OTS director has made similar comments. The respondent believes the OCC and OTS need to continually reduce its excess management ranks just as the FDIC is doing. Also, it is suggested that the OCC and OTS could reduce its examination costs by having FDIC safety and soundness examiners participate on their large and problem examinations.

8.  Using multiple dates in the examination requires substantial additional work to go into archived records to respond to requested data. There should be just one date, the current date as of the start of the examination.

9.  The respondent expresses a concern with the removal of copies of customer information from the bank, such as copies of financial statements of the bank’s borrowers. The bank does not allow removal of customer information from the bank except for legal purposes. Is it proper for examiners to remove this information? Respondent suggests that examiners should transcribe all the information into their workpapers.

You’re right. The FDIC is only the primary supervisor of state chartered institutions that are not members of the Federal Reserve system. This does limit our ability to fully and completely understand the risks in the banking system and the exposure of the deposit insurance funds.

But we have tried to work around this problem as best we can. We have good relationships with the other supervisors at both the Federal and State levels. We recently concluded an agreement with the other federal banking agencies to clarify our special examination authority and – in particular – to provide us with better access to large complex financial institutions. This is a critical component of our banking system in America and the FDIC has an obligation to the taxpayers and the industry to understand this risk and be in a position to manage it.

Another thing we will be working on in the future is better offsite analysis. We need to use all available information – from the supervisory data, from the economy and from the capital markets – to construct models that help us understand as much as we can about an institution’s risk to the deposit insurance funds. This will help us formulate better policy solutions, set more effective risk-based premiums and better allocate our supervisory resources. We will always be on the lookout for ways to do a better and less burdensome job of understanding the risk in the banking sector and protecting the deposit insurance funds.

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2.   The regulatory agencies should coordinate their examination approach to ensure consistency of examinations and enforcement actions.

Virtually all bank regulations and major policies are developed and issued on an interagency basis under the direction of the Federal Financial Institutions Examination Council (FFIEC). The FFIEC is made up of the Federal Reserve Board, FDIC, Office of the Comptroller of the Currency, Office of Thrift Supervision and the National Credit Union Administration. The regulatory agencies have similar risk-focused examination approaches, although some differences do exist. The agencies share their guidance for their risk-focused examination programs and identify and discuss the differences. Since most of the examination policies and guidance are also interagency directives, the differences are usually minor and primarily reflect the differences in the size and type of institutions that each agency most often examines. These directives emphasize the risk focused examination approach and instruct examiners to focus on an institution’s higher risk activities. Of course external and internal factors are constantly changing and no two institutions are exactly the same, thus a flexible approach is necessary and examiners must be given the authority to use their judgement during the examination process.

In addition to the FFIEC initiatives the FDIC has worked jointly with the Federal Reserve and the Conference of State Bank Supervisors to develop Risk Focused Examination Guidance that is used by both the FDIC and Federal Reserve and a large number of state banking authorities. This joint guidance, titled "Risk Focused Supervision" provides several "Examination Modules" that provide specific analysis procedures on how to conduct a risk focused examination. Also, beginning April 1, 2002, the FDIC instituted a more streamlined examination process for small, well-run banks. The program is called Maximum Efficiency, Risk-Focused, Institution Targeted (MERIT) Guidelines. It applies to well-managed, well-capitalized banks with total assets of $250 million or less. This program has been presented to all the regulators.

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3.  We received several comments regarding examiner retention and training.

As a former banker, I understand the importance of having examiners who are knowledgeable and efficient. Let me first say that we will continue to make sure our folks work quickly and efficiently when they are in a banker’s place of business. I have communicated this to our examination force and will continue to do so.

Beginning July 1, 2002, and thereafter, we will survey banks following every examination. The survey will allow bankers to comment on the efficiency of the examination process and help us do our job better.

I agree that examination personnel turnover is a problem for us. As you can probably understand, the travel requirements for FDIC examiners are quite – well -- burdensome. Those requirements can sometimes be very stressful and personally demanding, particularly for our examiners who have families. We are trying to be sensitive to this – whether it is reducing the amount of time examiners spend in the bank conducting examinations or experimenting with telework. We will continue to seek other ways to develop expertise and competence in our examination force and minimize examiner turnover.

On a final note, I want to say that it is imperative for all FDIC employees to understand deposit insurance and be knowledgeable of the supervisory and resolution processes as well as other important corporate missions and goals. In this connection, I have developed an "FDIC University" and a formal job rotation program, which together will provide every FDIC employee with the information and experience necessary to understand how their primary job fits within the Corporation’s overall responsibilities. I believe strongly that this ‘corporate’ view will help our folks better represent our organization to the wider world – and better articulate our mission and goals to the industry and the public to which we are accountable.

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4.  We received many comments relating to the burden associated with compliance and CRA examinations.

In summary, these comments touched on topics such as suggestions to entirely do away with compliance and CRA, conducting abbreviated examinations for CRA and fair lending, the amount of time spent conducting compliance examinations for small institutions, and exempting small banks from CRA.

Let me begin my response to all of these comments by affirming that we strongly support enforcement of consumer protection and fair lending laws. Congress has given us this responsibility, and I believe it is important for us to ensure that banks treat members of the public fairly and uphold the law.

Congress enacted consumer protection laws for various reasons. Many of the laws were enacted either to ensure that consumers are able to make informed choices about credit transactions and deposit accounts; or to ensure that women and minorities, as well as others, have equal access to credit.

Some of the situations addressed by consumer protection and fair lending laws resulted from widespread, deeply engrained practices. Others were the result of a few rogue companies, generally not banks. Nevertheless, the laws are imposed on all financial institutions to ensure a level playing field in the marketplace and we will enforce them. As with all legislation, consumer protection, fair lending and community reinvestment laws reflect compromises between widely differing points of view about the extent of a particular problem, and how best to solve it. These compromises often result in complex rules. I know these rules are often confusing for financial institutions and difficult to administer.

One suggestion was that the FDIC not spend a lot of time attempting to identify fair lending samples. I agree that a streamlined approach can be followed in certain circumstances. Examiners must balance a number of factors when conducting examinations, including the degree of risk of violations and the impact on an institution of a lengthy examination. Last November, we issued guidance to our examiners about fair lending examinations of institutions with a low risk of discrimination. Low risk institutions include many community banks located in homogenous areas, with stable product lines and policies, and limited staff turnover. We hope this guidance will result in less burden for financial institutions. Our compliance examiners will continue to conduct other fair lending examination procedures as appropriate. This guidance is posted on our website at www.fdic.gov/regulations/examinations/index.html#comp.

Another suggestion was that we could increase the level of trust with banks by combining our examination staff so there is a single point of contact. Again, I agree. I have recently reorganized the FDIC’s examination function by combining the compliance and safety and soundness supervision operations under a single national director and six regional directors. This will reduce the number of contacts for banks, although we will continue to have specialty examination staffs. We believe this is necessary due to the increasing complexity of consumer protection laws, as well as the increasing complexity of safety and soundness issues. Of course, the best way of building further trust with bankers and the public is putting knowledgeable, well-trained examiners in the bank who can provide reasoned advice to institutions about problems and how to resolve them.

The suggestion made by one commentator to incorporate the results of compliance examinations in the management component of CAMELS ratings is a good one. In fact, we do this now. The interagency standards for reports of examinations and for CAMELS make clear that compliance with the laws and regulations is a primary management responsibility.

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5.  Safety and Soundness, Compliance, and Information Technology examinations should be done concurrently so that the need to provide the same information multiple times can be lessened.

Not only do I agree with your suggestion, but you will be happy to know that our current policy is to conduct specialty examinations (Compliance, Trust, and Information Technology) concurrently with the safety and soundness examination. However, we have found that some banks simply do not have sufficient workspace to accommodate the combined examination staff. In other cases the size or structure of the department make concurrent examinations inefficient or impractical. In these situations banks generally prefer to have the examinations done independently, so we give them that option. We also occasionally have scheduling conflicts where specialty examiners are unavailable when the safety and soundness examination is scheduled. If the examination can be rescheduled we try to do so. But many times we have no alternative but to conduct the safety and soundness examination as scheduled because of commitments to other regulators or because of statutory examination frequency requirements that dictate it. We are reemphasizing our burden reduction efforts and hope that the industry will help us out. For example, at every examination our examiners are required to solicit ideas from the banks on ways to improve the examination process and reduce burden. The suggestions we receive are included in the confidential section of the examination report, reviewed by our senior staff and implemented wherever possible.

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6.  Special Authority - As the insuring agency, the FDIC needs to know first-hand what is going on in problem and large institutions, regardless of charter. Perhaps the FDIC should be examining national banks on an alternate basis.

I wholeheartedly agree that the FDIC needs to know what is going on in problem institutions and large institutions. Since the FDIC is only the primary supervisor of state chartered institutions that are not members of the Federal Reserve System, we are limited in our ability to directly measure and control the risks in the banking industry and our own exposure .

Nevertheless, there is no excuse for our not understanding these risks and working in conjunction with our fellow supervisors to address them. We have good relationships with the other banking agencies at both the Federal and State levels. We recently concluded an agreement with the other federal banking agencies to clarify our special examination authority and - in particular - to provide us with better access to large complex financial institutions. This is a critical component of our banking system in America and the FDIC has an obligation to taxpayers and the industry to understand this risk and be in a position to manage it.

Another thing we will be working on is better offsite analysis. We need to use all available information - from the supervisory data, from the economy and from the capital markets - to construct models that help us understand as much as we can about an institution's risk to the deposit insurance funds. This will help us formulate better policy solutions, set more effective risk-based premiums and better allocate our supervisory resources. We will always be on the lookout for ways to do a better and less burdensome job of understanding the risk in the banking sector and protecting the deposit insurance funds.

Through these cooperative efforts, we believe we can assure ourselves as the insurer that major problems and risks in the banking industry are being identified and, as necessary, that appropriate corrective actions are being taken.

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7.  The OCC has made public comments about the examination fee disparity between national and state-chartered banks. The respondent indicates a former OTS director has made similar comments. The respondent believes the OCC and OTS need to continually reduce its excess management ranks just as the FDIC is doing. Also, it is suggested that the OCC and OTS could reduce its examination costs by having FDIC safety and soundness examiners participate on their large and problem examinations.

While I can not speak directly to the OCC's and OTS's expense reduction efforts, I do know that both agencies have stressed their commitment to controlling costs and minimizing the supervisory burden on their regulated institutions.

With regard to FDIC examiners participating in the examinations of large and problem institutions, we recently concluded an agreement with the other federal banking agencies to clarify our backup examination authority and - in particular - to provide us with better access to large complex financial institutions. This is a critical component of our banking system in America and the FDIC has an obligation to taxpayers and the industry to understand this risk and be in a position to manage it.

As to the broader issue of overall regulatory costs, I recently gave a speech in which I questioned the need for all for all the duplicative bureaucracy we have within the federal banking agencies and suggested some reforms – including the sharing of examination responsibilities with the other banking agencies. The text of my speech is here.  I hope you will read it and give me your thoughts. Thank you.

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8.  Using multiple dates in the examination requires substantial additional work to go into archived records to respond to requested data. There should be just one date, the current date as of the start of the examination.

Typically there are three dates used in the examination. The "examination start date" is the date the examiners arrive at the bank. This date is used for timekeeping and scheduling purposes and generally is not involved for any information requests. The "examination as of date" is generally the most recent quarter-end date and is the date used for all of the financial information contained in the report of examination. By using a recent call report date, the standard reports generated at quarter-end provide examiners with the information they need without any additional costs or delays. In the past the financial information had to be prepared as of the date the examiners started the examination. The bank had to prepare an entire series of special reports for the examiners including exception reports that normally are prepared only on a weekly, monthly or quarterly basis. The third date is the "asset review date". This date is used by the examiners to review the loan portfolio. Examiners are instructed to select a date that is meaningful for the analysis, but not overly burdensome on the bank. Although the three-date format was implemented as a way to reduce burden on the banks, your recommendation suggests that we should review the current practice and determine if other changes may be necessary to further reduce burden. We will do that.

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9.  The respondent expresses a concern with the removal of copies of customer information from the bank, such as copies of financial statements of the bank’s borrowers. The bank does not allow removal of customer information from the bank except for legal purposes. Is it proper for examiners to remove this information? Respondent suggests that examiners should transcribe all the information into their workpapers.

I understand your concern about this issue. I agree that our examiners should not be removing documents wholesale from the bank and holding them offsite. We have been given authority, however, to copy documents that we need to support examination findings or research possible supervisory actions. I don’t anticipate that will change. But I can assure you we have numerous procedures in place to protect the confidentiality of your records – your examiner can explain these procedures to you – and that we will not abuse this authority.

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