Community Banking Connections

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Federal Reserve Seeks to Conduct More Loan Reviews Off-Site

The Federal Reserve System continually seeks opportunities to be more effective and efficient in the execution of its supervisory responsibilities. Toward that end, the Reserve Banks have for some time conducted off-site work, primarily related to financial analysis and policy reviews, as part of bank examinations. This off-site work helps examiners to develop focused questions and prepare for meetings with bank management during the on-site part of the examination. While loan portfolio review is generally conducted on-site, tasks such as balancing the loan portfolio to the general ledger and developing the scope of file review may be performed off-site. Technological advances are now making possible the review of actual loan documents off-site.

During 2013, the Fed initiated a pilot program that included a series of targeted off-site loan reviews at institutions of various sizes and in different parts of the country. As a part of the pilot, the Fed surveyed state member banks to determine their willingness and technological ability to support off-site loan reviews. The survey identified a growing number of state member banks that had the technology and were willing to participate. Banks have typically provided examiners with electronic loan portfolio information through a secure transmission prior to an examination for preliminary analysis, but most of the review of specific loan files has then been done on-site at the bank. During the pilot, examiners received secure access not only to loan portfolio information but also to the actual electronic loan documents needed to conduct a credit review. The pilot examinations generally consisted of one week of off-site loan review activity, followed by one week of on-site activity, which involved much less time at the bank than the traditional two-week on-site examination.

The Federal Reserve generally received positive feedback from those banks that participated in the pilot, with many banks noting a general reduction in business disruptions. Moreover, Federal Reserve staff who participated in the pilot noted that the off-site work made the examination process more efficient and cost-effective by reducing travel without reducing the quality of the credit review. The pilot reviews were not without challenges, however, principally related to technical hurdles surrounding the imaging process and the preparation of data for examiner use. For example, for examiners to be able to review electronic loan files, the image quality must be sufficient for easy reading, and the images must be sorted and labeled in ways that allow for timely, consistent, and accurate searches. Additionally, some bankers raised concerns about the potential impact of the reduced ability to share their insights through face-to-face interactions while discussing loans, assigning asset classifications, or resolving general issues.

The Federal Reserve is reviewing lessons learned from the pilot and plans to institute off-site credit review more widely for interested banks in the near future. Bankers interested in participating in the off-site loan review program should keep in mind the following factors:

• Technical preparation activities will require front-end resources to ensure that data are transmitted and/or made accessible to examiners in a secure method. Access to the loan images is usually provided through a secure virtual private network (VPN) client or by uploading exported images to a secure portal, but other sources may also be considered. Federal Reserve staff members understand that not all banks have the technical capacity to participate in the program; at this time, participation will not be mandatory.
• Maintaining effective and ongoing communication with examination staff throughout the loan review process, which includes on-site face-to-face conversations, is critical.
• A blended approach for loan reviews may work better for certain banks. For example, most credits could be analyzed with preliminary loan-specific questions answered off-site and emerging portfolio issues or themes and overall final results discussed on-site. Alternatively, a bank could provide off-site access to a particular loan portfolio or other subset of loans, with other portfolios reviewed on-site.

The effective use of technology can be a key tool to enhance the bank examination process and the Federal Reserve's communications with bankers. Leveraging the continuing maturation of imaging technology, such as through off-site examiner credit reviews, is one example of how the Fed seeks to enhance the effectiveness and efficiency of its examination processes.