Better Markets filed a comment letter with the Federal Deposit Insurance Corporation (FDIC) in response to the agency’s request for information on its supervisory approach to bank examinations during the COVID-19 pandemic.

Under the Federal Deposit Insurance Act 1950, banking regulators of insured depository institutions are required to examine banks’ practices and performance on-site at least once every 12 to 18 months. However, following the President’s National Emergency Proclamation concerning the COVID-19 pandemic in March 2020, the FDIC ordered all bank examinations to be conducted remotely, and the FDIC is apparently seeking to make bank examinations more off-site than before the pandemic.

Why it Matters: Bank regulators like the FDIC supervise banks by evaluating their practices and performance to ensure economic stability and compliance with consumer protection, community reinvestment, and national security laws. Robust bank supervision is bolstered by bank examiners being able to engage with bank personnel directly on-site. Moreover, bank examiners can learn more about a bank’s processes and procedures in person, which is more conducive to having an interactive demonstration as opposed to a virtual setting.

What we said: While Better Markets acknowledges that some supervisory activities may be equally effective while more efficient for both examiners and banks when conducted remotely, efficiency must not be gained at the expense of effectiveness. Rather than seeking to gain efficiencies in the examination process, the FDIC should be seeking to determine which examination activities must be conducted on-site and accordingly set on-site examination requirements. Importantly, the FDIC must consider that comments received by the banking industry will likely be biased as banks have every incentive to provide comments that serve to give them an advantage in the examination process.

Bottom Line: Better Markets urges the FDIC to be thoughtful as it moves forward in its determination of future on-site vs. off-site examination activities. The FDIC should use this opportunity and information collection to focus on strengthening their supervisory activities rather than weakening them under the guise of “efficiency.”