FDIC’s Hoenig Proposes ‘Full Scope’ Big Bank Exams

By Joe Adler

Thomas Hoenig, already well known for demanding that Wall Street banks should get back to basics, is proposing the same mantra for their examiners. Just as Hoenig advocates for more tangible measures of banks’ capital and liquidity, the Federal Deposit Insurance Corp.’s vice chairman has stepped up calls for examiners to do a better job verifying a big bank’s safety and soundness through a more “systematic review” of its nuts and bolts. The scope of big-bank exams is inevitably restricted by the breadth of what goes on inside a giant company as compared to the regulators’ limited exam resources. But Hoenig says relying on a bank’s internal findings, using data modeling and stress tests and reviewing targeted risk areas — now key components of large-bank exams — are no replacement for a thorough look at its operations. Hoenig’s idea about the scope of exams is just beginning to spark chatter among D.C. policy watchers, with some supportive and others skeptical. “It’s the old-school bank exam. Just like you saw in ‘It’s a Wonderful Life,’ the examiner puts his eyeshades on, sits down at a desk and starts counting everything,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics. But Petrou questioned whether more comprehensive exams are the answer to keeping big banks in check. She said some of the supervisory failings leading up to the crisis — such as chief regulators not acting on problems flagged by examiners and leadership of firms themselves not having a good handle on risks — may not necessarily have been stopped with more comprehensive exams. “Why would” reviewing every loan at Washington Mutual “have been any better than the examiners who should have been able to see the giant pile of turd in the middle of the room?” Petrou said. “You don’t have to count each turd to know there’s a really big pile.”