What banks do when no one's watching
SYLVIE DOUGLIS, BYLINE: NPR.
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WAILIN WONG, HOST:
This is THE INDICATOR FROM PLANET MONEY. I'm Wailin Wong.
DARIAN WOODS, HOST:
And I'm Darian Woods.
WONG: There is more turmoil this week for the financial system, and that has put the spotlight on the people our government hires to spot red flags at banks and make sure problems get fixed before they blow up into something bigger. We are talking about bank examiners.
WOODS: Today on the show, we will examine the work of bank examiners - what they do, what happens when they're not around and why we might be running out of them.
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WONG: To understand how important bank examiners are, you only have to look at what happened 40 years ago with one group of financial institutions called savings and loans.
WOODS: So there was this government office in Arkansas, and it was responsible for supervising savings and loans in five states. And in 1983, this office was relocated to Texas, and a bunch of employees quit.
WONG: This left the office with just two bank examiners covering nearly 500 savings and loans. It became this kind of natural experiment of what happens when there's suddenly no bank supervision. Kiah Haslett is managing editor at Bank Director, an industry magazine.
KIAH HASLETT: It was still on the bankers themselves to follow the rules. So this is like maybe a teacher leaving the classroom, and the class, like, still actually knows what they're supposed to do.
WOODS: But knowing what you're supposed to do doesn't mean that you will do it.
WONG: Yes. And according to a research paper by two Federal Reserve economists, what ensued was basically the bank equivalent of throwing spitballs and drawing butts on the chalkboard.
HASLETT: These institutions grew much more rapidly. They entered deregulated and riskier lending spaces. They used riskier types of funding.
WOODS: And then it took three years for the head office in Washington to act. In 1986, hundreds of examiners descended on the region for a six-week supervisory blitz. And some of these savings and loans hadn't gotten a comprehensive checkup in two or three years.
WONG: When the blitz was over, there was a huge surge in enforcement measures. The examiners also submitted over 500 criminal referrals to the Department of Justice.
HASLETT: There was some shenanigans that happened. The teacher left the classroom for three years, and everyone went wild. They just committed crimes because no one was checking to make sure that they weren't committing crimes.
WOODS: So having a regular cadence of checkups can help prevent everything from behavior that's, you know, risky but not illegal all the way up to outright crimes. And that's because bank examiners can be very thorough. They look at balance sheets and loan documents, written policies and even board meeting minutes.
WONG: They're combing through this material to figure out things like, is this bank liquid enough to handle all of its obligations? Is this bank following anti-discrimination laws on fair lending? What kinds of policies does a bank already have in place to detect fraud?
WOODS: And here's how the work of a bank examiner generally unfolds. If they need to flag something, the first kind of warning they issue is called a matter requiring attention, or MRAs for short.
WONG: These warnings are kept confidential. They are not made public. Now, if the problem doesn't get fixed, a regulator can escalate things by taking an enforcement action, like issuing a cease-and-desist order. And these enforcement actions are made public.
WOODS: Kiah says that problems can arise when a bank doesn't act on the early warning or when the regulator doesn't properly escalate issues. These are the questions that are now swirling around Silicon Valley Bank and its regulators.
HASLETT: You know, what kind of communication did SVB receive from examiners? How did examiners assess the risk that SVB was taking? And was that communicated that the management team needed to actually do something about it versus be aware of it?
WONG: Recent news reports say that as early as 2019, supervisors did issue several of these matters-requiring-attention notices to Silicon Valley Bank. More information about exactly what unfolded on the examination side should come out in May. That's when the government will release its formal report on the SVB failure.
WOODS: Now, Kiah says, for the most part, banks and regulators want to work together. A lot of banks have somebody in-house, like a risk management officer, who's there to spot problems, too. And the outside scrutiny adds another layer of protection.
HASLETT: I think, in general, banks want a qualified, competent, fully staffed examination force. They don't want examiners that are stressed or feel like they have too much work.
WOODS: But making sure we have enough bank examiners could be a real problem in the near future. Kiah was alerted to this last month when she was doing some late-night reading.
HASLETT: Sometimes I'll just open my computer and read a research thing at, like, 9:30 at night.
WONG: On a - like, a weeknight.
HASLETT: Yeah. That's when I do my best work, 10 p.m. on a Tuesday...
HASLETT: ...Just tweeting. And I was just tweeting...
WOODS: And something that caught Kiah's eye was a government report that revealed that over 20% of employees at the FDIC were eligible for retirement in 2022. Now, the FDIC is one of the government offices that employs a lot of bank examiners.
WONG: And the report also said that this number of retirement-eligible employees is set to get even higher in the next five years. Adding to the staffing problem is that the FDIC's bank examiners in training were resigning in much larger numbers than a few years ago.
WOODS: Right. This sounds like a familiar story.
WONG: Oh, for sure. Yeah, people are reevaluating whether they want to be at their jobs all over the place.
WOODS: It's true.
WONG: Now, it generally doesn't take a special degree or certification to become a bank examiner. They usually need a bachelor's degree with some coursework in accounting or finance, but they typically get their training on the job. And at the FDIC, training takes about four years.
WOODS: So the overall picture from this government report was pretty grim - a lot of experienced bank examiners reaching retirement, the next generation quitting and no quick fix for getting newbies trained up.
HASLETT: It's really hard to be an examiner. A lot of the banks are on the smaller side, and so you're just driving through, like, God's country to spend some time at these small banks. And that can probably be pretty isolating. And I think sometimes when you have a relatively calm banking environment, you're a little divorced from why your work is so important.
WONG: Darian, do you remember what it's like to have a calm banking environment?
WOODS: Those were the days. I mean, it was three weeks ago, at least on the surface.
WONG: (Laughter) But we've all aged so much since then.
WOODS: But it does feel like a lot longer than that.
WONG: Yeah, I think all this reminds us that we need people monitoring the banks properly, and it's not necessarily a job that can be just fully automated.
WOODS: Right. And even the remote working revolution hasn't hit the bank examining workforce as much as it could in other industries. There's still this protocol of in-person visits, which can be really valuable.
WONG: Yeah. Kiah points to what happened at a small bank in Chicago a few years ago when an examiner was doing an on-site visit.
HASLETT: An employee pulled the bank examiner over and basically said, this bank is a giant fraud, and you need to come back and do a big, thorough examination of this bank.
WOODS: I mean, that's not the kind of thing you can do over Zoom, right, Wailin?
WONG: No. Like, what are you going to do - organize a breakout room and invite the examiner in so you can be a whistleblower? No.
WOODS: No. You need a corridor. And a fuller review uncovered a massive embezzlement scheme that resulted in criminal charges for 14 people. And the bank - the Washington Federal Bank for Savings - was shut down.
HASLETT: I think the Washington Federal Bank for Savings' failure shows that actually having an examiner on-site where someone can confidentially pull them aside and say, something is not good at this bank, is a useful thing and one we should be really careful about taking away.
WOODS: Kiah says there's something else the bank supervision profession could learn from past challenges in the financial system. In times of trouble, federal regulators tend to staff up, and they expand by recruiting rank-and-file employees from the very banks that are being shut down.
WONG: So if regulators end up closing more banks this year, it could create an intriguing hiring opportunity. Maybe we'll see some of the survivors of today's bank failures go on to prevent future ones.
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WONG: This episode was produced by Corey Bridges with engineering from Katherine Silva. It was fact-checked by Sierra Juarez. Viet Le is our senior producer. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.
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