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Examining Banks, Serving the Nation's Financial System

The Philadelphia Fed's bank examiners provide local knowledge and keen insight that help the Federal Reserve achieve its goal of financial stability. They play a vital role in ensuring that the banks in eastern Pennsylvania, southern New Jersey, and Delaware are pursuing safe and sound business practices and complying with regulations that protect consumers.

Some 160 staff members in the Bank's Supervision, Regulation and Credit Department have supervisory responsibility for 130 bank holding companies and state member banks in the Philadelphia Fed's Third District. Their work helps the Philadelphia Fed assess each bank's risk management systems, financial condition, compliance with laws and regulations, training programs, and internal controls.

Examiners possess unique knowledge of an individual institution's operations, an understanding of the firm's management strategy, and an awareness of the economic environment. And they use their business acumen to ensure that banks build robust risk systems and comply with consumer laws, both of which promote a strong, safe, and sound financial system.

Examining BanksThe examiners' knowledge of the local economic environment and their familiarity with local financial institutions enhance their effectiveness as bank supervisors. For example, while commercial real estate values have presented a problem for banks nationally, markets differ widely across local areas. Understanding these differences is critical to evaluating the condition of community banks that operate primarily within a local market. Similarly, understanding how a particular bank manages its risk enables examiners to better focus on key risks that may affect the bank's consumer compliance and financial soundness.

This local knowledge of a bank's operations and its risk profile helps to identify business trends, underlying economic risks, and emerging regulatory concerns. Further, local insights about the banking environment add to the mosaic of information that Philadelphia Fed President Charles Plosser shares with colleagues on the Federal Open Market Committee (FOMC), the Federal Reserve's main body for monetary policymaking.

An important goal of the Federal Reserve's bank supervision activities is to ensure that banking organizations can meet the credit needs of communities. As the nation continues to recover from a severe recession, many people have expressed concern about the ability of small businesses and consumers to obtain credit.

Banks are the primary source of credit for small businesses, and community banks play a particularly important role in extending credit to small businesses. In turn, small businesses play a key role in economic growth and job creation. Yet, it remains difficult for them to receive and renew credit in the current environment.

"We are working very hard to see that our banking organizations strengthen their financial condition and enhance their management systems so they are able to operate in a safe and sound manner while meeting the needs of businesses and consumers," said William W. Lang, senior vice president and chief examinations officer in the Supervision, Regulation and Credit Department.

"Our examiners' deep knowledge of our banking organizations and the communities they serve helps us to be more effective in accomplishing this task," Lang said.

While businesses and consumers continue to face challenging credit conditions, there have been some positive signs in the tri-state region. During 2009, commercial banks based in the Third District were able to increase their loans to small businesses. Many banks have increased their potential capacity to lend by raising additional capital. In fact, Third District banks raised $688.7 million in 2009 and $748 million in the first quarter of 2010.

Throughout the crisis, regulators have urged lenders to make prudent decisions and continue lending to creditworthy borrowers. The Fed also accompanied this guidance with training programs for its supervisory staff and state examiners and with outreach to the broader banking community to ensure that supervisory policies and actions do not inadvertently curtail the availability of credit to sound small business borrowers.

Ultimately, the challenge for banking supervision is the need to ensure safety and soundness without dampening the competitive spirit. "I think it's important to make sure that when risks are taken, the bank has strong corporate governance in place because even excellent supervision cannot supplant the bank's overall management," explained Executive Vice President and Lending Officer Michael E. Collins.

"Our goal is not to stop banks from taking any risk, since this would prevent banks from serving their critical role in our economy. Balancing these objectives appropriately requires skill, experience, and judgment," Collins observed.


Evolving Environment for Examiners

The specialized knowledge of the Fed's examiners is invaluable because it gives the Fed a window into the nation's economy, banking system, and financial markets. The depth and breadth of resources allows the Fed to see developing trends and growing weaknesses that go beyond looking at firm-specific or geographic issues and focus on imbalances building in the industry or the broader economy that could affect these firms.

Collins, who began his career as a bank examiner at the Philadelphia Fed more than 30 years ago, has witnessed sweeping changes toward this macro-prudential approach in supervisory practices. He noted that supervisory tactics now focus on a continuous evaluation of a bank's condition and rely more on stress tests and the expanded use of market data and forward-looking assessments.

Examiners complete a rigorous training regimen focused on one of two distinct disciplines: safety and soundness or consumer compliance. Specialized training for each includes on-site instruction, classroom work, and several levels of competency tests spanning a three- to five-year period, depending on the examiner's intended specialty. Once employees receive an examiner's commission, they embark on a continuous learning track to enhance their credentials. They also work extensively with an experienced team of examiners before they advance to lead a team on their own.

Although there is no one model or personality preferred for examiners, those who hold this position share common goals and similar backgrounds. Some examiners hold degrees in accounting, finance, or law, and all are expected to demonstrate an ability to think critically, communicate effectively, and negotiate skillfully.

These analytical skills serve them well in the field. In fact, Federal Reserve Chairman Ben Bernanke said in a recent speech, "So while many bankers tell us that Federal Reserve examiners are analytical and tough, few tell us that they are unfair or uninformed about what's going on in the local economy. We believe that this kind of response speaks to the effectiveness of our supervisory program for community banks, and we take pride in the professionalism and quality of our community bank examiners."*

  • * Ben S. Bernanke, "Preserving a Role for Community Banking," speech at the Independent Bankers of America National Convention, Orlando, FL, March 20, 2010.