When Bank Examiners Get It Wrong: Financial Institution Appeals of Material Supervisory Determinations

Abstract

Banks and credit unions sometimes complain that the examination process regulators use to police banking practices is oppressive. These financial institutions complain that regulators reach unduly negative examination conclusions known as “material supervisory determinations.” Institutions are wary because negative determinations can subject an institution to further regulatory scrutiny or enforcement actions.

To guard against erroneous determinations, Congress, in 1994, enacted a statute requiring federal financial institution regulators to provide an appeals process. Each of the four regulators (the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve, and the National Credit Union Administration) adopted a unique material supervisory determination appeals process.

Using data (some collected through Freedom of Information Act requests) about material supervisory decision appeals since 1994 and interviews with top regulators, this Article provides the first in-depth analysis of the appeals process. It shows that the appeals process is sometimes dysfunctional and seldom used.

To improve the appeals process, the Article recommends three changes. First, once a regulator issues a material supervisory determination, financial institutions should have direct access to a dedicated appellate authority outside of the examination function. Second, the appellate authority should engage in a robust review process; it should consider a broad scope of appealable matters and employ a clear and rigorous standard of review. Third, regulators should release detailed information about each decision reached by the appellate authority.

Keywords: bank, credit union, examination, OCC, FDIC, Federal Reserve, NCUA, appeal

JEL Classification: G21, G28, K23