Bank regulators are shifting toward a more streamlined examination schedule, opting to examine banks less frequently. For many financial institutions, this move is a welcomed relief, promising less disruption and the anticipation of lower compliance costs. However, as with Newton’s third law—every action has an equal and opposite reaction—this change carries a set of tradeoffs that banks must carefully consider.
Understanding The Tradeoffs
As an example, consider a college student beginning a new class. If given the choice, would they choose to have only one exam, a comprehensive final at the end of the semester, or would they prefer to have tests distributed throughout the semester? While the former may imply less work and effort; there are negatives associated with it, the primary one being there is no way to measure what the professors’ expectations are and where the student is in relationship to these expectations.
Likewise, fewer regulatory examinations contain a similar set of tradeoffs. Fewer on-site regulatory exams mean less interruption to day-to-day operations. Bank staff can therefore focus more on normal operations rather than preparing for and managing examinations. On the other hand, longer periods between exams can lead banks to lose touch with shifting regulatory priorities. Without regular feedback, institutions might miss emerging risks or fall behind on compliance standards.
Further, with infrequent, all-encompassing exams, issues may accumulate unnoticed, resulting in bigger problems when finally discovered, while more frequent exams may allow for early detection and course correction. This also significantly raises the risk of complacency and procrastination in addressing issues. Less regulatory scrutiny could lead some banks to relax their guard, inadvertently increasing the risk of non-compliance or operational lapses.
Key Takeaway
Reduced regulatory engagement will require discipline and banks to step up their internal controls, monitoring, and self-assessment practices to fill the gap left by less frequent external review. To truly benefit from a streamlined exam schedule, banks must invest in robust internal controls, compliance systems, and ongoing staff training. Regular internal audits, real-time risk monitoring, and a proactive approach to regulatory changes become even more important. The responsibility shifts from external examiners to the bank itself, making self-discipline and oversight critical to long-term stability and success.
Conclusion
The move to a streamlined bank examination schedule brings both relief and new responsibilities. While banks enjoy fewer disruptions and lower compliance costs, they must also guard against regulatory drift and complacency. By understanding the tradeoffs and strengthening their internal controls, banks can navigate this new landscape effectively, turning a regulatory shift into an opportunity for growth, resilience, and more complete and comprehensive compliance management.