Seal of the Board of Governors of the Federal Reserve System
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM

WASHINGTON, D. C.  20551

DIVISION OF BANKING
SUPERVISION AND REGULATION


SR 94-31 (FIS)
May 6, 1994

TO THE OFFICER IN CHARGE OF SUPERVISION
          AT EACH FEDERAL RESERVE BANK


SUBJECT: Coordination of Specialty Examinations with Full Scope Safety and Soundness Examinations of State Member Banks

                         Over the years, the banking industry has become more complex as banking organizations have increased their activities in specialized areas.  In order to address this change, the Federal Reserve has established various specialty examination programs to evaluate electronic data processing, trust, and other specialized functions at state member banks.  In general, these approaches have helped to ensure that specialized functions receive high supervisory priority.

                        However, in recent years, a number of banking organizations have reported that the increasing number of specialty examinations add significantly to the workloads of their staffs and management.  Accordingly, this statement is intended to reduce burden caused by staggered examination activities by providing that most aspects of regular safety and soundness examinations of state member banks be conducted concurrently, whenever practicable.

Coordination of Examinations

                        In view of the preceding, Reserve Banks are asked to offer all state member banks the option of having electronic data processing, trust, and other specialized examinations conducted concurrently with regular safety and soundness examinations. Also, consistent with Federal Reserve inspection guidelines, inspections of holding companies should be conducted with the examination of their lead bank to the extent possible.  Consumer Compliance examinations, however, will continue to be performed in accordance with separate schedules.

                        In communicating this option to state member banks, Reserve Banks should make clear that, although every effort will be made to accommodate an institution's request for such coordination, in some instances, limitations in the availability of specialty or safety and soundness examination staff may preclude fulfillment of the request.   Moreover, when a request for coordination has been received, Reserve Banks should ensure that the requesting institution understands that the demands on an institution's space and staff will be greater over the period that the examinations are conducted concurrently, but that the overall amount of time spent by the institution's staff in meeting the requirements of various Federal Reserve examinations over the course of a year should be greatly reduced.  Further, Reserve Banks should emphasize that the coordinated examination approach will not preclude Reserve Banks from conducting necessary targeted examinations in areas of financial or operational concern at any time.  

                        The coordination of supervisory activities requires careful planning, which should consider the concerns of the management of banking organizations.   Space and human resource limitations, as well as other operational concerns, may make it impractical for some organizations to accommodate concurrent examinations and, accordingly, these institutions may prefer that their examinations continue to be performed under existing practices.  Reserve Banks should respect these preferences as long as they do not interfere with essential supervisory functions .

                         Consistent with the June 10, 1993 Interagency Policy Statement on Examination Coordination and Implementation Guidelines, Reserve Banks should continue to work closely with state and other federal banking agencies to coordinate supervisory efforts.  In addition, any communication with the management and boards of directors of institutions involved in this program should be coordinated among state and federal banking agencies to the extent possible.  

Procedural Issues

                         Certain procedures may require modification once this program is in place.  For example, established frequency schedules for some specialty examinations may require minor modification to facilitate the coordinated examination process. In addition, the coordination of examinations may necessitate modifications to procedures governing the access to, and distribution of, reports to ensure that appropriate Reserve Bank and Board staff members retain access to reports and that the integrity of examination information databases is maintained.

                        Given the importance of effective communication, changes in the procedures governing communication between Reserve Banks and state member banks must also be considered. Specifically, it may be appropriate to combine various first day letters for each coordinated activity into a single comprehensive first day letter.  In addition, the coordinated approach may be enhanced by conducting a single closing meeting with a banking organization's Board or by combining separate examination findings into a single report.  However, Reserve Banks should continue to generate separate reports and supervisory ratings for each specialty activity and to distribute these reports consistent with existing procedures for each examined entity, unless directed otherwise.

                        Reserve Banks should commence ascertaining the preferences of state member banks as early as possible.  While it is recognized that examination and inspection schedules for 1994 are already in place and may, therefore, complicate the fulfillment of coordination requests, Reserve Banks should still attempt to coordinate examinations as soon as possible, if requested.  Board staff expects that requests for coordination will be given a high priority at future scheduling sessions.  In addition, program implementation guidance will be given during a telephone conference call; the procedural issues discussed above will be addressed by Board staff as necessary; and comments regarding your early experience with coordinated examinations will be solicited within six months.

Benefits of Program

                         This program is primarily intended to reduce unnecessary regulatory burden associated with the examination processes.  However, additional benefits are expected.  For example, the coordination of certain specialty examinations with safety and soundness examinations should afford examiners a comprehensive understanding of the overall condition of each examined bank and, thereby, should enhance the supervisory process.  In addition, coordinated examinations should encourage communication among examiners with diverse skills and backgrounds and should facilitate cross-training of examination staffs. Reserve Banks are encouraged to explore opportunities to improve training and use staffs more effectively in conjunction with implementation of the coordination process.

                        A suggested draft letter that introduces the coordinated examination approach is attached and should be sent to the chief executive officer of each state member bank in your district.  Should you have any questions regarding coordinated examinations or this letter, please contact Larry Schiff at (202) 452-5268 or Kevin Bertsch at (202) 452-5265.

Richard Spillenkothen
Director

ATTACHMENT TRANSMITTED ELECTRONICALLY BELOW


To:  The Chief Executive Officer of Each State Member Bank

SUBJECT:  Coordination of Specialty Examinations with Full Scope Safety and Soundness Examinations of State Member Banks

        Over the years, the banking industry has become more complex as banking organizations have increased their activities in specialized areas.  In order to address this change, the Federal Reserve has established various specialty examination programs to evaluate electronic data processing, trust, and other specialized functions.  In general, these approaches have helped to ensure that specialized functions receive high supervisory priority.  However, in recent years, a number of banking organizations have reported that the increasing number of specialty examinations add significantly to the workloads of their staffs and management.

        As a result, and consistent with other Federal Reserve initiatives to lessen the burden of regulation on the banking industry, your state member bank is offered the option of having its electronic data processing, trust, and other specialty examination(s)1 conducted simultaneously with its regular safety and soundness bank examination.  When considering this option, please be aware that during the period of a concurrent examination the number of examiners in your institution is likely to be increased from the number required to conduct a single bank or specialty examination, and that the demands on your office space and your staff may be greater over this period.  In conducting these examinations concurrently, however, the Federal Reserve believes the overall amount of time that your staff spends meeting the requirements of various Federal Reserve examinations conducted over the course of a year will be greatly reduced.

        If you decide that the coordinated examination approach will be beneficial to your institution, this Reserve Bank will strive to implement that decision.  However, certain constraints may preclude full coordination of all examinations each year.  We ask you to recognize, further, that the coordination of examinations will not preclude Reserve Banks from conducting targeted examinations in areas of financial or operational concern at any time.

        Please be assured that requests for the coordination of specialty examinations with regular, full scope, safety and soundness examinations will be given our full and prompt attention.  If you wish to have the Federal Reserve examination staff begin to arrange its scheduling so that these aspects of regular safety and soundness examinations of your state member bank be conducted concurrently, or if you have any questions about this program, please call [Reserve Bank Contact Person] at [phone number].
        
        


Footnotes

1.  Consumer Compliance examinations will continue to be performed on existing, separate schedules.  Return to text


SR letters | 1994