Banking Law

Long-time community banking attorney wrote a recent article for the ABA Banking Journal online that discusses a fact of life for most banks: when bank examiners walk in the door at the start of an examination they already know what the examination results are going to be, and the examination process itself amounts to an exercise in amassing support for a predetermined conclusion.

Did you ever wonder if the examiners have an agenda when they walk into your bank?
 
Of course they do.
 
In fact, they have a pretty darn good idea what they are going to rate your bank before they ever walk in the door. Since the typical examination staff on the whole appears to be younger and less experienced these days, what incentive do they have to change the "pre-assigned" rating given to them by the Washington office? 
 
The answer is?they don't.

Jeff cites the FDIC's Case Manager Procedures Manual, which lists three types of "off-site" monitoring by the FDIC in Washington, D.C. that are used to arrive at conclusions about the condition of the bank. Two of them deal with growing banks, which aren't the major problem these days that they were when banks weren't suffering, as so many are these days. The major monitoring technique he focuses upon is the Statistical CAMELS Off-site Rating"  (SCOR) system, which "serves as a predictive index of whether the bank's component ratings and composite rating will be downgraded at the next examination."

These monitoring systems do more than prepare the field examiners for visits. From the monitoring results, FDIC then creates an Off-site Review List. If you want to know why you may have received an interim change in your bank's CAMELS rating, it is because this Off-site Review List applies to any institution that has a CAMELS 1 or 2 that has been identified by one of the SCOR systems as having a 35% or higher probability of being downgraded to a 3 or worse.
 
We have had a number of our clients in the last four or five months that have received letters from FDIC indicating the bank had been downgraded in its CAMELS rating from the Off-site Review.

As Jeff also (some might say "cynically" but I'd say "wisely") observes, whether the field examiner is 27 or 57 years old, there's no incentive to "buck D.C." and disagree with the home office's evaluation. Anyone whose dealt with government bureaucracies for any length of time knows that government employees don't progress by being free-thinkers and mavericks. The nail that sticks out almost always gets hammered down.

Jeff finishes with a rueful, sarcastic flourish, a bemused observer who's spent too many years viewing life through the looking glass.

In fact, when our firm blew the whistle on the SCOR Report in connection with some administrative litigation a number of years ago, FDIC then conducted a study to determine whether the SCOR was a good predictive index of the results of the examination. FDIC wanted to know that if the SCOR report predicted that a bank would be downgraded, would the on-site examiner actually downgrade the bank.

Guess what?

The SCOR Report turned out to be an excellent predictive index. If the SCOR Report determined the bank should be downgraded, the examiner did too.

Big surprise.

Jeff, like a former president once emoted, "I feel your pain."

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I'll be giving a webinar for BankLawStuff this Wednesday on the legal risks of social media for bankers and ways to mitigate those risks. I'm giving a substantially similar presentation at the annual convention the Texas Association of Bank Counsel on October 7 in Austin, Texas, so if you're attending the TABC event, then unless you're a glutton for punishment, you may want to pass on the webinar. I'll discuss three areas, focusing most of my time on the use of social media by banks to market or "brand" themselves, but I'll also discuss the legal risks posed to banks by their employees use of social media and using social media as part of a bank's pre-employment screening.