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Evolution of Bank Supervision: 1990–1999

Evolution of Bank Supervision
  1. 1863-1913not active
  2. 1914-1939 not active
  3. 1940-1959not active
  4. 1960-1979not active
  5. 1980-1989not active
  6. 1990-1999Active
  7. 2000-2011not active
  8. 2012-Presentnot active

In the 1990s the OCC formalized a system of risk-based supervision that explicitly tied oversight to the type and degree of risk presented by each national bank.

This was a sea change from previous supervision practices. Supervision by risk focuses on evaluating risk, identifying material and emerging problems, and making sure individual banks act before any problems compromise safety and soundness. Supervision by risk is responsive to changing risks at each institution and sensitive to evolving market conditions and regulatory changes.

In 1996 the uniform ratings system added a sixth risk category to the CAMEL acronym established in 1979 with sensitivity to market risk. There are also component ratings assigned for the specialty areas of Information technology, Trust, Consumer Compliance, and the CRA—also known as ITCC.

Camels
Examiners communicate a bank’s ratings in the Report of Examination. Evaluations of the component areas take into consideration the bank’s size and sophistication, the nature and complexity of its activities, and its risk profile.

Banking operations were becoming more complex, increasingly deviating from the traditional loan and deposit-taking model. This complexity posed new risks and required shifts in capital standards and reporting requirements.

New laws, like the Riegle–Neal Interstate Banking and Branching Efficiency Act of 1994 and the Financial Services Modernization Act of 1999, gave banks a level of autonomy not seen since the 1930s and created more responsibility for examiners. For instance, interstate bank mergers required extra scrutiny: who would be in charge of the resulting institution and what was management doing to marry the cultures of the two banks?

Bill Clinton signs financial services regulation act of 1999
President Bill Clinton signs the Financial Services Modernization Act of 1999, known as the Gramm–Leach–Bliley Act, on November 12, 1999. (Courtesy of the William J. Clinton Library)

The very act of examining itself had changed dramatically. By the 1990s, computers had taken over—ringing a death knell for adding machines that examiners used to “run the tape” and verify every number in the examination report.

When discussing being among the first examiners recruited with computer skills in 1989, Rafael DeLeon, retired Director for Banking Relations, said:

“I got pulled onto a lot of assignments because I knew how to use that contraption.”

An illustration of a computer and spreadsheet from the 1990s.
An illustration of a computer and spreadsheet from the 1990s.

Unlike safety and soundness reports, where ratings are highly confidential, CRA performance evaluations are public. In 1995 the OCC began publicly publishing CRA performance evaluations. Before 1995, people had to go the bank or branch and ask to see the bank’s public file to read the evaluation.

Unofficial Rules of Bank Examining

  • Be skeptical with a healthy sense of curiosity. If it doesn’t look or sound right, ask questions.
  • Trust but verify. Start from a position of trust but follow up.
  • Supervision by risk means looking into a lot of areas without completing a full review. Dig into it if it doesn’t appear correct.
  • Where there is smoke, there is fire. Don’t settle for identifying the red flags; look for the root cause of the problems to come up with a lasting solution.
  • Let the facts speak. Stick to interagency definitions and use handbook booklets for guidance.
  • Draw your own conclusions. Don’t worry about what previous people did.
  • Don’t swim alone. Don’t go into tough meetings with management alone.
  • None of us is as smart as all of us. Use your examination team, lead experts, and leadership.
  • No surprises. Don’t surprise bankers at the exit meeting, don’t surprise leadership in the exam report, and don’t surprise each other.

A Closer Look