Overview
We are seeing reverberations from recent bank failures in our clients’ regulatory examinations, and many are experiencing unanticipated ratings downgrades. As we help clients prepare for their upcoming examinations, we’ve recently been working with them on the following issues:
Lessons From Recent Bank Failures. These lessons include the importance of establishing holistic risk management structures, developing more sophisticated concentration analyses, and maintaining sufficient liquidity. On that last point, examiners are expecting more granular liquidity monitoring and have recommended that banks conduct time-sensitive tabletop liquidity exercises like they do for cybersecurity threats.
External Risk Factors. Regulators are increasingly evaluating banks not just based on their inherent risk, but on how organizations are impacted by third-party relationships, like those related to technology vendors, fintechs, Banking-as-a-Service, and broader industry trends, like the availability of liquidity sources and potential interest rate volatility. As such, banks should consider those external factors when making decisions about issues such as entering into critical third-party relationships, prudent capital and on-balance sheet liquidity levels, as well as appropriate dividend payments.
Don’t Ignore Compliance. Even with the significant financial pressure that banks are currently facing, now is not the time to ignore consumer compliance. Several of our clients recently have been subject to fair lending investigations by their regulators and the DOJ, through which they learned the importance of evaluating lending data more carefully, and determining their risk for engaging in disparate treatment of protected individuals throughout the entire lending process.
Engaging with Regulators. Proactively establish dialogue with regulators before upcoming examinations to highlight strengths and demonstrate that weaknesses are being addressed. This is especially important for banks that engage in unique or novel activities. We’ve been helping clients prepare for every phase of the examination process, including preliminary discussions to identify potential hotspots, advocacy letters in response to regulatory criticisms, and attending examination exit meetings to help support the bank’s management team and board.
In this new environment, banks cannot assume that their next examination will be as positive as their last one. Regulators are under pressure to identify weaknesses earlier and to address them with increasing seriousness. We’re seeing this happen at some of our top-rated institutions, so don’t assume that you’ll be immune to tougher scrutiny in some areas of your bank, even if you’re doing well overall.
