Office of the Ombudsman
Importance of Examinations
Over my tenure with the FDIC, I have witnessed good and bad times for the banking industry. During good times, some bankers pressure regulators to relax their supervision by arguing that regulators' unnecessary, burdensome requirements interfere with the free market.
Recently a banker shared his experience related to this topic, which I retell without verifying its accuracy. According to the banker, he and three other banks faced unfair competition from a fifth bank because it was not held to the same regulatory standards. As a result, this fifth bank pushed local interest rates down and pressured the other banks to relax their underwriting and appraisal standards. This banker's knowledge came from interactions with credit applicants who would discuss how this fifth bank was offering lower rates, not requiring appropriate appraisals, and not questioning the qualifications of borrowers as closely as his bank. The other three bank presidents also discussed similar experiences with their credit applicants. Our banker contact highlighted the importance of subjecting all the financial institutions to the same level of scrutiny, which, as I have said, is often used in good times to mean reducing supervision for all the banks.
But then, the banker explained that this fifth bank failed during the recession. This story became a cautionary tale suggesting we should be careful about relaxing supervision during good times; and, it suggests the real advantage is to banks with good supervision. After all, examinations help ensure banks operate in a safe and sound manner and can help bank management reduce the risk of failure. Having said this, I think it is important for bankers and regulators to make supervision as efficient and effective as possible. But this should be done through careful reasoning, and with an eye towards ensuring confidence in the banking system.
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