Banking in the Ninth

Safety and Soundness Offsite Examination Work

Safety and Soundness Update

Aaron Zabler | Assistant Vice President

Published September 15, 2014  | September 2014 issue

The Federal Reserve Bank of Minneapolis increasingly uses technology to conduct more of its examinations off-site (i.e., not on the premises of the bank). Secure access to electronic records means we can review policies, procedures, internal bank reports and, at times, imaged loan files from our offices. In this Safety and Soundness Update, we explain the off-site examination process, the benefits of this program and the challenges that could arise.

Off-Site Examination Process

Planning for off-site examination work begins during the pre-examination management interview and examination scoping process. Examiners consider what work can be completed off-site and what needs to be completed on-site to conduct an effective supervisory review. We expect to maintain an on-site component of examinations to complete certain transaction testing, observe processes, test controls and hold key discussions with management. However, to the extent possible, we plan to complete the remaining examination work off-site. Much of the off-site work relates to operational areas and financial analysis (e.g., capital, earnings, liquidity, sensitivity to market risk and audit). In addition, some examiners may be working off-site while others are on-site at the same time.

Banks typically need to provide more information in advance of the examination than they had previously to enable us to complete expanded work off-site. We leverage information we already gather through ongoing supervision by our Relationship staff to minimize our requests. Further, the amount of information the bank holds for the examination team to review on-site is often reduced by the provision of information earlier in the process. Put another way, the change to off-site examination processes primarily alters where work is done rather than what work is done.

Many supervised institutions send information to the Reserve Bank through IntraLinks, a website provider that enables secure data exchanges between the bank and examiners. We remove files from the website after the close of the examination. While use of a secure website is the most common method of providing data, alternatives include use of encrypted files on removable media (USB flash drive or DVD) or paper records if preferred.

Good communication with bank management in order to determine how contacts are made, by whom, and how frequently is critical for the off-site examination process to work efficiently. Examination teams typically establish and conduct regular conference calls with bank management during the off-site examination. These calls allow both parties to remain informed, promote clear communication and facilitate timely completion of examination work.

Benefits to Off-Site Exams

Increasing the amount of work we complete off-site has benefits for banks. In particular, it

  • reduces the number of examiners at the bank and thereby reduces the burden of hosting a large examination team; and
  • reduces working space requirements and may lessen the disruption to bankers’ day-to-day business, as fewer examiners are vying for time with bank management and staff.

Some Challenges of Off-Site Exams

Although the benefits to conducting examination work off-site are significant and outweigh costs, the process does have some challenges, albeit ones that we have been addressing and will continue to address. Our discussion of the examination process above identified the need for more proactive management of examiner communications with bank management. Loan review poses a unique set of challenges, centered on accessing and evaluating loan files. Some banks have uploaded loan files to the secure website along with other information, while others may grant examiners file access through either a SharePoint site or a virtual private network (VPN). The security and access for these latter options can present hurdles that generally require 60-90 days of lead time before the examination. We evaluate the indexing and file structure of imaged loan files prior to the examination in order to determine if an off-site review can be done efficiently.

To read more about the Federal Reserve System’s off-site loan review efforts, see the second quarter edition of Community Banking Connections.

A Final Word

We would appreciate your feedback as we continue to refine the off-site examination process and conduct more off-site loan reviews. If you have ideas for how we might improve the off-site aspect of our examinations, please discuss them with the examiner-in-charge or contact your Relationship manager.

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