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“Requisite response” and exam aftermath

How well you handle exam findings initially may determine how hard you get slapped—if at all

“Requisite response” and exam aftermath

There is an exam underway, and the examiner-in-charge asks to see you. Sure enough, the exam team has found something.

Perhaps you had had a nagging feeling, heading into the exam, that you might have exposure in the area cited. Maybe you didn’t. In any event, the EIC tells you that the matter is serious, and if further evidence sustains what the examining team has seen so far, it will require multiple matters to be brought to the attention of the board.

Now what? When faced with bad news from examiners, anger, confusion, frustration, and more can crowd in. Don’t let them. Adopt a mindset I call “requisite response”—supervisory findings should be treated seriously and with respect. Only then can your bank make the best of the situation.

Time to be methodical

First, don’t fight. Investigate.

That means asking to see the specific facts that the examiners are citing. Talk to them to determine exactly what concerns them most—and why.

Then go back to your team, promptly. Verify if the examiners have their facts straight. If not, gather the facts as you see them and seek further discussions with the examining team. If the facts are right, but you can cite offsetting considerations, of course do so.

However, you may determine that the examiners’ finding is both substantially accurate and could lead to serious consequences.

What next?

Commit to the fix

The first thing: If the examiners prove right, don’t dispute it. Let them know you, too, consider the matter of great importance, find the current circumstances unacceptable, and are taking immediate action to rectify past occurrences and alter future behavior.

In one case I’m familiar with, a bank was writing sound C&I loans, but its policy was found wanting.

Examiners expressed grave concerns with the policy shortfalls and were considering strong action—despite their finding that the loans themselves were properly underwritten.

After a brief back-and-forth about why existing policies were adequate, members of management took it upon themselves to commit to complete and have the board approve a comprehensive policy revision during the pendency of the exam. And so they did.

While the issue was mentioned in the exam report, it was in passing. Not even an MRA—“matters requiring attention”— resulted. In fact, the examiner-in-charge stated that he was impressed that the bank was capable of generating a comprehensive policy in so short a short time.

Importance of your response

So what did the rapidity and completeness of response achieve? 

First, it demonstrated the capacity of the lending staff to properly underwrite the loans it was making. If the competency did not exist, the team could not have pulled together the response in the short time it did.

Second, and I suggest more importantly, the response demonstrated complete commitment to rectifying examiners’ concerns. A slower response or further dispute of the finding simply would have rendered the same remedial efforts far less effective.

When things didn’t go so well …

In the next case, deficiencies were found in nearly every banker’s bête noir, AML compliance.

And this came just as the bank was preparing its application for its first acquisition in several years.

The tale here did not have as satisfactory an outcome as the prior one, but it was likely the best possible under the circumstances.

Examiners found a number of deficiencies in the bank’s AML program. The findings were serious enough that they could lead to a citation that the bank was in violation of its Bank Secrecy Act obligations, which would have effectively quashed the pending acquisition.

Once management became convinced of the validity of the findings, the bank took immediate action. New policies and procedures were drafted and brought to the board for approval within days. The bank called in a consultant, and that triggered a second round of further enhanced policies and procedures that were adopted with weeks. A Suspicious Activity Reporting Committee, which had not previously been in place, was organized and convened.

And then the waiting began. Examiners huddled for some time to determine if in fact the deficiencies cited should be deemed a violation. Management waited . . . and waited.

Finally, the examiners convened a call to inform management of the outcome. No violation was found, though a series of rectifying actions were required—and the acquisition took place as planned.

Cooperation goes a long way

For those of you who regularly work with examiners, you know that they don’t reveal all their internal considerations.

However, I can’t help but think that they were convinced in these cases that their message had been received and that management would take all necessary steps to make the required changes.

Management had provided the requisite response … and the examiners decided they didn’t have to use their full powers of persuasion.

To achieve the most effectiveness, this kind of response needs to be consistent over time.

If examiners become convinced that management takes examiners’ concerns to heart; is willing to confront adverse facts as they actually exist, and promptly resolve deficiencies, you will have created a real off-balance-sheet equity position in your bank.

Perhaps that will be in the form of fewer findings.

Or perhaps less severe findings and proposed remedies.

All it takes is the requisite response.

Daniel Rothstein

Dan Rothstein is CEO of DR Risk Solutions, a consulting firm specializing in enterprise risk management, loan portfolio management and regulatory relations.  Rothstein’s career spans more than 30 years, and he has spearheaded the development, implementation, and successful integration of best practice ERM programs, operational risk and control systems, and credit and loan portfolio management. He is also an attorney admitted in New York. You can reach him at [email protected]

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