Striking a Risk-Based Balance When Things Are Very Good; FDIC Supervision Head Nick Ketcha Pushes for Moderation among Both Bankers and Examiners

Good times worry Nicholas Ketcha, Jr., FDIC's director of the Division of Supervision and overall boss of the insurance agency's field force of safety and soundness examiners. It's not that Ketcha is some kind of masochist, but that he is concerned that bankers and examiners keep their perspective in such times. From the regulatory side, he wants to make sure that examiners don't take the lessons of the past so much to heart that they stomp on the present. From the banker side, he wants to make sure that the industry keeps in mind that good times don't last forever -- in spite of the length of the current up cycle. A tool to help strike that balance is the FDIC's "supervision by risk" program -- part of a broad effort by all the federal banking regulators. Ketcha, a veteran of nearly 30 years of FDIC service, discussed these concerns in a recent interview with ABA Banking Journal. His remarks have been edited for both space and clarity. Q. How far has FDIC progressed with its supervision by risk program? A. In conjunction with the Federal Reserve and the Conference of State Bank Supervisors, we've worked up a supervision-by-risk program that we're in the process of implementing. We're starting training next week [in August] on a set of modules that we've been field testing over the past year. We started our supervision-by-risk effort about a year and a half ago. As we moved forward, we were consulting with the other agencies. The Federal Reserve was interested in the approach we were taking and said it would like to join in if we weren't that far along. We then also invited in the CSBS, as all three of us do exams of state-chartered banks. We wanted to develop some consistency. We were looking at 17 modules, covering everything from credit risk to liquidity risk to more specific types of credit risk. It all followed what we had done a year or so ago on the interest-rate risk side, which entailed a set of decision flow-charts. There were certain core questions to ask and procedures to follow in each area. The principle for the new modules is the same. Depending on what the examiners find, they would make a decision. They could decide they were comfortable and, as I characterize it, they don't have to turn over any more rocks in that area. Alternatively, they could decide to go into expanded procedures and perform what we call an impact analysis, which would determine what kind of supervisory action we would take. Over the past year we've been testing these modules in each of our regions and the Fed has been testing them in the 12 district Fed banks. Likewise, state banking departments have been testing them in all CSBS regions. Based on the feedback, we've refined the modules and have finalized procedures. Q. What is the thinking behind the modules themselves? A. What we tried to do was capture the decision process an experienced senior examiner would make regarding the scope of an examination. The examiners will be using the new procedures as part of every exam. The idea is to make the exam more efficient and less intrusive. We've already been doing much more pre-planning of exams based on off-site analysis and information requested from the banks. And we speed up loan analysis with a computer program that produces the loan slips that examiners use for credit analysis by obtaining a bank's loan files and running it through a program on our examiners' laptop computers. The banks win because we won't be on site as long as we have been in the past. Our examiners win because they can I do a full exam but they can do more still of it closer to home. One of the major reasons for examiner turnover is the amount of travel that is involved, particularly in the western and midwestern states. And it's a win for FDIC, because we cut our cost tremendously and yet are still able to do full-scope examinations. …