GAO Identifies Weaknesses in FRB and FDIC Supervisory Escalation Processes

The Government Accountability Office identified weaknesses in the Federal Reserve's and FDIC's processes "related to escalation of supervisory concerns." More positively, the GAO found that the OCC generally adheres to its procedures for escalating supervisory concerns. 

The GAO highlighted the following weaknesses in the Federal Reserve's escalation procedures:

• Lack of enforceable guidelines: The Federal Reserve has not issued regulations under Section 39 of the Federal Deposit Insurance Act on corporate governance and risk management, which may have contributed to delays in addressing unsafe banking practices at Silicon Valley Bank.
• Unfinalized Dodd-Frank rule: The Federal Reserve has not finalized a rule required by the Dodd-Frank Act that is intended to promote earlier remediation of problems at financial institutions.

The GAO highlighted the following weaknesses in the FDIC's escalation procedures:

• Absence of centralized tracking system: The FDIC does not have a centralized system for tracking supervisory recommendations, limiting its ability to identify emerging risks across supervised banks.
• Lack of formal "vetting" process: The FDIC does not have a formal process to ensure large bank examination teams and relevant stakeholders are consulted before making escalation decisions, which can lead to, among other things, alterations in conclusions without proper consultation.
• No rotation requirements for case managers: The FDIC does not require large bank case managers to rotate after a few years at a single institution. The GAO said that implementing such requirements could limit close relationships between FDIC large bank case managers and bank management, which helps to ensure that such managers maintain supervisory independence.

In contrast, the Office of the Comptroller of the Currency was found to generally adhere to established procedures for escalating supervisory concerns to enforcement actions. The OCC's procedures include (i) "collaborative decision-making processes" and (ii) "documentation of divergent views between examiners and supervisors."