SRC Insights: Fourth Quarter 2003

Bank Examiners Aren't Born Bank Examiners: They are Carefully Trained

by Ian R. Harvey, Manager - Staff and Career Development

You receive the phone call you knew was coming: the Federal Reserve examiners will soon be starting the examination of your bank. You recognize the name of the Examiner-in-Charge (EIC), since this is the same EIC from the last examination. However, you wonder how many new faces you will see this time, and how qualified those new people will be. Rest assured that Federal Reserve examiners complete a rigorous training program, consisting of classroom work, self-study, and on-the-job training, to ensure that they are capable of effectively supervising financial institutions. Let's examine the training program…

The staff that examine banks today are both different than and similar to those that examined banks in prior years. While Federal Reserve System (System) examiners are degreed professional staff and many have years of experience outside the System, the type, scope, and extent of System training they receive after being hired has changed significantly in recent years. Examination staff always received a great deal of training, but the structure and training changed with the issuance of letter SR 98-2, New Training Program Leading to Commissioned Examiner Status, in 1998. ¹ This program has been adjusted, amended, and updated over the years, even as late as this summer when additional modules relating to asset-liability management were added to the curriculum.

Safety and Soundness Track
Most new assistant examiners are assigned to the "Safety and Soundness" track in the training curriculum. This begins with a two-to-three week orientation program, which teaches everything from the basics of banking and bank examinations to administrative details necessary to perform the job correctly. A significant amount of self-study work, modules, and assessment tests are included in this part of the curriculum.

Normally, assistant examiners are sent into the field to work with experienced examiners for a short while before they attend their first major two-week class, Banking and Supervision Elements (BASE). This course provides assistant examiners with the basic terminology and information on ratings interpretations that they will use in the field. It also presents the first opportunity for assistant examiners to meet and interact with examiners from other Districts, building a resource network that will serve them well over their career with the Federal Reserve.

After completing BASE, assistant examiners complete the first major self-study program, which includes 84 hours of immersion in bank analysis ratios and tools, the Uniform Bank Performance Report, various regulations, and concepts in information technology and mortgage securities, as well as the first set of self-study modules on asset-liability management. Assistant examiners are then prepared to attend Operations and Analysis School (OpAS).

OpAS emphasizes concepts and interdependencies among common operational, analytical, and supervisory themes and techniques for banks, bank holding companies (BHCs), and foreign banking organizations (FBOs). OpAS also introduces assistant examiners to risk concepts, both in theory and in a risk-focused supervision environment. In the context of guided reviews, small group activities, and case studies, participants evaluate risks and assign ratings to simulated banks and BHCs using CAMELS and BOPEC frameworks. Participants also review the ROCA rating framework for FBOs.

After OpAS, assistant examiners complete the second major self-study program, which includes 77 hours of immersion in credit analysis ratios and tools, applications, consumer regulations, and additional, more advanced, asset-liability modules. After completing the second self-study program, the assistant examiners attend Credit Risk Analysis School, which emphasizes credit skills.

Either before or after completing the second self-study program, assistant examiners attend two so-called soft skill courses. The Report Writing course helps them during an examination and in making a written contribution to the examination report. They also attend Conducting Meetings with Management, a school designed to teach assistant examiners how to facilitate and properly prepare for internal meetings and for meetings with bank management. Assistant examiners also attend one other soft-skills class, Management Skills, later in the program. This class teaches assistant examiners critical thinking, teamwork, negotiation, and listening techniques.

The last three courses of the program are the most difficult and all-encompassing. They are Fundamentals of Interest Rate Risk Management (FIRRM), Bank Management, and Examination Management. FIRRM teaches assistant examiners the advanced technical concepts and supervisory context of interest rate risk, liquidity, and funding. Bank Management is primarily a simulation course, where members of the class assume management positions in a simulated bank, managing the bank while faced with issues related to credit, liquidity and funding. The Examination Management class, or X-Man, is the capstone of the program. In X-Man, assistant examiners become familiar with the skills and responsibilities of an EIC in the risk-focused examination process; learn how to gather appropriate information to analyze examination issues; analyze and evaluate the risks of a financial institution, paying particular attention to the risk management processes; integrate elements of consumer affairs, fiduciary, and information technology examinations into the evaluation of an institution's risk profile; and develop investigative skills to aid in researching various aspects of the supervision environment.

Specialty Tracks
After completing BASE, some assistant examiners pursue one of two specialty tracks, Consumer Affairs or Information Technology. Assistant examiners specializing in Consumer Affairs take many of the same courses as safety and soundness assistant examiners. However, instead of taking classes related to bank operations, credit analysis, and interest rate risk, they take Consumer Compliance I and II, CRA Examination Techniques, and Fair Lending Examination Techniques. In addition, the self-study curriculum for Consumer Affairs assistant examiners focuses on consumer and compliance-related regulations and issues.

Assistant examiners specializing in Information Technology are subject to the requirements of SR 98-36, Training Program for Information Technology Examiners.² This program ensures that the assistant IT examiner receives specialty-specific knowledge and skills that are closely related to the competencies needed in similar IT positions within the banking and IT industries, in addition to the core supervision knowledge conveyed in the safety and soundness examiner curriculum. The System uses the Certified Information Systems Auditor (CISA) program, a globally accepted standard of achievement among information system professionals that is sponsored by the Information Systems Audit and Control Association, for the assistant IT examiner's mid-level training requirements. In addition to taking many of the core safety and soundness courses and passing System proficiency examinations, an assistant IT examiner is required to achieve a CISA designation as a prerequisite to receiving an examiner commission.

Introducing: The Commissioned Examiner
During the approximately three years assistant examiners are in training, they are required to take two proficiency examinations, one after BASE and one after X-Man. Successful completion of these examinations, coupled with demonstrated skills on-the-job, allows an assistant examiner to earn the coveted designation—Commissioned Examiner.

However, the examiners' learning journey is far from over. Federal Reserve examiners' learning continues throughout their careers, as they continue to hone their technical and supervisory skills through on-the-job training and continuing professional development (CPD). The System's CPD Program, which is described in detail in SR 02-1, Framework for Continuing Professional Development of the Federal Reserve Examination and Supervisory Staff, allows commissioned examiners to continue to expand their knowledge in areas related to banking, finance, accounting, and regulatory changes, ensuring that they remain able to supervise effectively even the most complex financial institutions. ³

So…the examiners are coming. You can be assured that they and their counterparts back at the Reserve Bank have the experience and training to effectively supervise financial institutions. Now, it is time to start gathering the information that they will review before the on-site examination begins.

¹ SR 98-2, New Training Program Leading to Commissioned Examiner Status .
² SR 98-36, Training Program for Information Technology Examiners .
³ SR 01-2, Framework for Continuing Professional Development of the Federal Reserve Examination and Supervisory Staff .

The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.

SRC Insights: Fourth Quarter 2003

Bank Examiners Aren't Born Bank Examiners: They are Carefully Trained

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