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The benefits of building a relationship with your bank examiner

Posted by Sageworks

In a recent Forbes article, Frank Sorrentino, Chairman and CEO of ConnectOne Bank, offered his take on how financial institutions should flip their mindset on regulators and examinations. The piece, titled “Why Banks Should Stop Fighting and Learn To Love Regulators,” suggests that while institutions of all sizes are grappling with increased scrutiny and regulation, the reality is that it is here to stay following the financial crisis.

Sorrentino says, “As the backbone of the US economy, our nation’s growth depends on community banks figuring out how to operate in this ever-increasing regulatory environment. Because regulators are so deeply sewn into the fabric of our business, it’s time to recalibrate our approach to how we work with them (emphasis on with them vs. around them).”

Stress testing is one such area where many smaller banks are feeling the weight of regulation. While the spotlight that accompanies stress testing only applies to the nation’s largest banks each spring per Dodd-Frank, regulators and examiners now regularly encourage community banks to follow similar processes to ensure adequate capital levels, as well as to safeguard the institution against a significant shift in the national or local economy. Community banks that have been encouraged to stress test, and those who have proactively done so, also benefit from the aid that the stress test results can provide in building a bank’s larger strategic risk management plans.

The practice of stress testing can also foster a more positive relationship with examiners. As Sorrentino points out, a solid, two-way relationship “can mean the difference between struggling to merely meet regulatory requirements and uncovering opportunities otherwise deemed impossible.” He adds that like with any successful relationship, this one, too, will take some work to build. It will require transparent communication and consideration of examiners on all levels of the bank’s functions. From a governing body’s standpoint, stress testing builds confidence in a bank’s overall risk management strategy. For the banker, a successful relationship can alleviate some of the apprehension traditionally associated with examinations.

Sorrentino offers some sound advice on how to rethink exam time: “Start thinking about this audience like you do any other key constituent – customers, employees, investors. When your regulators step into your bank to conduct an exam, they shouldn’t be faced with any surprises. They should understand exactly what you’re trying to achieve and how you’re achieving it.” This point is especially pertinent regarding stress testing – showing examiners how your institution is managing the risks appropriate to your business model and paving the way for better conversations.

While the goal of stress testing is to provide bank management with actionable steps that to improve their risk management and strategic planning processes, building a more positive relationship with examiners is a benefit not to be overlooked. Sorrentino comments that now more than ever, this relationship is an important one to nurture.

Sageworks is currently conducting our biennial Bank and Credit Union Examination Survey, which focuses on federal exam experiences. Upon the survey’s close, responses will be anonymously aggregated and made available free of charge through a report to be released later this summer. The goal of the survey and report is to allow bankers to learn from their peers’ exam experiences. Click here to take the survey.

tags: bank exams, bank regulations, Dodd-Frank, exam survey, examiners, regulatory enforcement, stress testing