The process for escalating supervisory concerns at banks and other regulated institutions has weaknesses that should be addressed, according to a report issued Tuesday.
The Government Accountability Office (GAO) said bank failures in 2023 “raised questions about federal regulators’ ability to promptly address unsafe banking practices.” In its follow-up investigation, the GAO said, “we found weaknesses in regulators’ processes for addressing issues.”
The congressional watchdog pointed to the Federal Deposit Insurance Corp. (FDIC) as an example. According to the report, FDIC examiners told GAO that bank managers sometimes altered their reports without consultation or documentation, potentially introducing risk of bias.
“Unlike other regulators, FDIC does not have a formalized process to ensure that large bank examination teams and relevant stakeholders are consulted before making changes or decisions, such as escalation decisions,” GAO said. “Examiners from two selected banks cited concerns about managers altering conclusions without consulting the examiners or being unreceptive to divergent views. Procedures, such as vetting meetings, requiring managers to consult with large bank examiners and other stakeholders could ensure decisions are grounded in the evidence gathered during examinations.”
The agency recommended that FDIC, among other things, should develop a central database for recording and reporting supervisory recommendations, similar to that used for matters requiring board attention. It also recommended “vetting meetings” and a requirement that case managers for “Continuous Examination” process institutions periodically rotate assignments
The GAO also cited the Federal Reserve for not fully implementing a portion of the 2010 Wall Street Reform and Consumer Protection Act (Dodd-Frank) designed, in part, to promote early intervention.
“The rule was intended to promote earlier remediation of issues at financial institutions,” GAO said. “Federal Reserve officials stated that other rules accomplish much of what the act intended but acknowledged that substantive items from the act remain unimplemented. By implementing the act’s requirements, the Federal Reserve could align its supervisory tools with congressional intent that it take early action before an institution’s financial condition deteriorates.”
The agency also said the Fed’s lack of a regulation or enforceable guidelines on corporate governance and risk management issues “may have contributed to delays in taking more forceful action against Silicon Valley Bank, which failed in March 2023.
“Such authority may assist the Federal Reserve in taking early regulatory actions against unsafe banking practices before they compromise a bank’s capital,” GAO said
For the Fed, the agency recommended it consider a regulation or enforceable guidelines on corporate governance and risk management under section 39 of the Federal Deposit Insurance Act, consistent with those issued by the other regulators. It also recommended that the central bank issue a regulation to implement remaining open portions of section 166 of the Dodd-Frank Act, taking into account prior proposals and public comments.