The Reduction of Regulatory Compliance Examinations for Financial Institutions

Thu 04 May 2017

Examination Cycle for Certain Small Insured Depository Institutions and U.S. Branches and Agencies of Foreign Banks Under $1 Billion in Total Assets.

The Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve Board (“FRB”), and the Office of the Comptroller of the Currency (“OCC”) issued joint final rules that increased the number of small banks and savings associations (“institutions”) eligible for a 12 month examination cycle bump to an 18 month examination cycle. The joint rules are intended to reduce regulatory compliance costs for smaller institutions, while maintaining safety and soundness protections. These rules are currently in effect.

Under the final rule, well-capitalized and well-managed institutions with less than $1 billion in total assets are eligible for an 18-month examination cycle. Previously, only institutions with less than $500 million in total assets were eligible for the extended examination cycle. Well-capitalized and well-managed U.S. branches and agencies of foreign banks with less than $1 billion in total assets are also eligible.

The final rules increase the number of institutions that may qualify for an 18-month examination cycle by more than 600 to approximately 4,800 institutions. In addition, the final rules increase the number of U.S. branches and agencies of foreign banks that may qualify for an 18-month examination cycle by 30 branches and agencies, to a total of 89.

The FDIC, FRB and OCC permit institutions with total assets not exceeding $1 billion to qualify for an 18 month examination cycle, if the institution:
• Is well managed – which generally means having a composite CAMELS rating of 1 or 2 and
• Is well capitalized – which generally means maintaining total risk-based capital of at least 10.0%, tier 1 risk-based capital of at least 6.0%, and a leverage ratio of at least 5.0%; and
• Is not subject to a formal enforcement proceeding or order; and
• Is not subject to a recent change in control.

For a U.S. branch or agency of a foreign bank with total assets of less than $1 billion to qualify for an 18-month examination cycle, the U.S. branch or agency of a foreign bank must have received a composite ROCA rating of 1 or 2 at its most recent examination and must meet the other applicable criteria listed above.

The FDIC also analyzed the frequency with which institutions with a composite CAMELS rating of 1 or 2 failed within five years, versus the frequency with which institutions with a composite CAMELS rating of 3, 4, or 5 failed within five years. The FDIC analysis indicated that between 1985 and 2011, 13 FDIC insured depository institutions with assets less than $1 billion and a composite CAMELS rating of 1 or 2 had a five-year failure rate that was one seventh as high as institutions with a CAMELS rating of 3, 4, or 5. The relationship between failure rates in the two ratings groups did not meaningfully change when the analysis was restricted to institutions with assets under $500 million compared to institutions with assets between $500 million and $1 billion. This analysis suggested that extending the examination cycle for these institutions with $500 million to $1 billion in assets by an additional six months, combined with the off-site monitoring activities and ability to examine an institution more frequently as necessary or appropriate, is unlikely to negatively affect the safe and sound operations of qualifying institutions or the ability of the agencies to effectively supervise and protect the institutions with total assets of less than $1 billion.

These rules have been in effect since February 29, 2016, pursuant to the interim final rules previously released. The rules were adopted as final without change on December 12, 2016.