Regulatory Paper Trail

The Federal Deposit Insurance Corp. quietly began training its examiners for a new “forward-looking supervisory approach” as early as 2009. Examiners were taught to “carefully assess the institution’s overall risks, and base ratings not on current financial condition alone, but rather on consideration of possible future risks.” The FDIC said it would use both on-site and off-site reviews and “accurate metrics” to identify risk in balance sheets.

The FDIC’s 2015 annual performance plan discussed the need “to implement more forward-looking supervision techniques” for well-rated banks, including those with CAMELS composites of 2, so it could spot deficiencies before they require formal action.

The FDIC has also proposed changing the way it assesses deposit insurance for community banks. The forward- looking proposal counts construction and development loans as higher risk under a new loan mix index, which could lead to higher assessments.

The Federal Reserve hinted early in 2015 that it was using forward-looking risk analytics to ferret out weaker community banks. The Fed ended the year by announcing it had made its supervision framework “more forward- looking and data-driven.” The new program includes the use of forward-looking metrics to target high-risk banks “for enhanced supervision,” while identifying “low-risk” banks that would merit more of a “streamlined supervisory approach.”

The Fed program will include an outlier list and a watch list that would identify banks “with expanded or new areas of risk-taking” and flags those in the early phases of financial trouble. The algorithms used in the data modeling were first tested on community banks, the Fed wrote, but they are now being expanded and customized for all banks. Some metrics are still being developed and full implementation is not expected until 2017.