FDIC Approves Extended Exam Cycles for Small Banks
Yesterday, the Federal banking agencies issued final rules that permanently extend the examination cycle, from 12 months to 18 months, for well-capitalized and well-managed banks, savings associations, and Federal agencies and branches of foreign banks with less than $1.0 billion in total assets.
The final rules, which implement a Congressional mandate under a 2015 statute, are identical to interim final rules issued on February 29, 2016. Prior to February, only firms with less than $500 million in total assets were eligible for the extended examination cycle.
To qualify for the extended 18-month cycle for full-scope on-site examinations, institutions must:
have total assets of less than $1.0 billion;
not have been subject to a recent change in control;
be “well capitalized,” which generally means, among other things, maintaining total risk-based capital of at least 10.0%, tier 1 risk-based capital of at least 6.0%, and a leverage ratio of at least 5.0%; and
be well managed, which generally means having a CAMELS management and composite rating of 1 or 2 and not being subject to a formal enforcement proceeding or order.
The agencies retain the discretion to subject otherwise qualifying banks to more frequent inspections.
While the rules do not expressly permit the agencies to keep banks on an 18-month cycle notwithstanding the existence an enforcement action or order, the agencies could nonetheless elect to do so. Historically, for example, and with some recent and notable exceptions, the OCC has permitted banks subject to enforcement actions or orders to retain their status as “well capitalized” even though the requirements for “well capitalized” status in 12 C.F.R. § 6.4 include a requirement that the bank not be subject to “any written agreement, order or capital directive, or prompt corrective action directive.”