Pub. 5 2017 Issue 1

www.uba.org 8 THE REGULATORY FEEDBACK INITIATIVE FINDS BANKS CRITICIZED IN EXAMINATIONS AT THE LOWEST RATE IN FOUR YEARS C reated by The Coalition of Bankers Associations in 2011, the Regulatory Feedback Initiative (RFI) consists of an anonymous electronic survey for bankers to provide an assessment of their most recent examination or visitation. Banks have provided feedback on over 3,000 examinations. In 2015 FinPro joined this important effort to assist with analyzing the data generated by RFI. The data through 2016 shows that banks are currently experiencing the lowest rate of regulatory criticism for safety and sound- ness examinations in the last four years. This trend mirrors public enforcement action data, which shows the most recent enforcement actions listed for companies in 2016 is 135, down from 175 in 2015, and a high of 398 in 2010. Apart from information technology, the trend is true across every CAMELS+ component. Since 2011 FinPro has used the bubble chart shown above to monitor the regulatory environment, plotting the CAMELS+ components based on their risk to institutions and the regulatory fo- cus. The bubbles move in accordance with the RFI findings with input from FinPro’s staff of former senior regulators. Things have changed dramatically since coming out of the financial crisis as sensitivity and compliance have overtaken asset quality, strategic risk, and IT risk. While, it may seem contradictory for a company whose slogan is “Building Value Together” to utilize a chart which prioritizes valuation so low, but it is important to remember that the market’s perception of risk, governance, and regulation drive trading multiples. Many institutions find the chart useful in remaining focused on top priori- ties when discussing strategy or preparing for examinations. In an article published earlier in the year titled “Tell Us the Good, Bad, and Ugly” we focused on the feedback provided in the survey as to what the regulators should start, stop, and continue. As a prequel, we would like to include start, stop, and con- tinue lessons garnered for bankers from reviewing the data of the new RFI survey. • Start incorporating technology into strategic planning. Falling behind in Fintech is a paramount strategic risk. This was a common theme through the regulatory panel and guest speak- ers at FinPro’s recent State of the Industry on November 10th. More- over, on November 18th at the 11th Joint Community Banker Symposium Comptroller of the Currency echoed this sentiment stating, “One particular issue testing bank’s strategic risk today is the tectonic shift underway regard- ing innovation and financial technol- ogy.” Both sessions addressed the fact that while larger banks have resources to develop, fund, or purchase tech- nology, collaboration is a useful tool for community banks to reduce costs, better serve customers, and reach new markets. • Expanding the scope of technology within an institution must come with the proper corporate governance. From the RFI results, IT risk man- agement has been a focus in 75% of examinations and is the only CAM- ELS+ area in which respondents received higher criticism in 2016 YTD than in 2015. Banker feedback on how the process is conducted ranges from “smooth” to “grueling”. FinPro’s experience aligns with a less emo- tional response in which one banker reported examiners were “extremely thorough”. Vital in preparing for an IT examination are to understand the components of an IT exam request well ahead of when the examiners send the letter, utilize the FFIEC Cybersecurity Assessment Tool guidelines on a quarterly basis, and IT 10 8 6 4 2 0 0 2 4 6 8 10 Impact To Risk Profile Regulatory Focus CURRENT REGULATORY ENVIRONMENT Reputation Capital Valuation Earnings Legal & Regulatory BSA Corp Governance Compliance Asset Quality Sensitivity Management Operational Liquidity Strategic Risk Management IT By Howard Headlee, Don Musso and Stephen Brown Klinger