18 Months Is Too Long

All the bigwigs in the federal government, from Ben Bernanke on down, have made it a point to blast banks for poor risk management practices. The thing is regulators’ risk practices aren’t much better.

As touched on in a comment recently by one of our esteemed members, federal bank regulators are on an 18-month inspection cycle. Let me explain what that means. As long as a bank’s risk profile doesn’t noticeably deteriorate, that bank will get a full evaluation only once every year and a half. To put it in the words of a spokesman for the Office of the Comptroller of the Currency, “They aren’t going to get a lot of attention.”

What this means is that there are banks which have not been visited by a regulator since October 2007. I think it is fair to say the banking world has changed a bit since then.

To be fair, if a bank is in trouble, regulators might be monitoring it “hour by hour,” the spokesman said. That may be fine when banking conditions are stable; they are anything but that today. At a smaller bank, for example, just one bad commercial loan could throw its performance ratios from good to horrific, and it won’t take anywhere near 18 months for that to happen.

The upshot is 18 months is too long. If a bank went 18 months without a thorough review of its practices, I wholly expect regulators to view that as a poor risk management practice. So why then do regulators wait so long between reviews? I know for a fact that the regulators are not even considering shortening the time between reviews. They should – before it is too late.