Report outlines risks of ‘regulatory capture’ related to documentation of bank examiners’ findings

Risks of “regulatory capture” – the phenomenon of a regulator acting in the interest of the regulated industry rather than the public interest – could be better documented by the federal insurer of bank deposits, the congressional watchdog said Friday.

In a report, the Government Accountability Office (GAO) recommended that the Federal Deposit Insurance Corp. (FDIC) improve how it documents banks’ progress at addressing the agency’s concerns outlined in examination reports. The watchdog agency said the FDIC has policies for documenting bank exam decisions, which the GAO said can reduce risk of regulatory capture. “However, FDIC staff did not always clearly document their analysis of how banks addressed areas of concern identified during examinations,” the GAO wrote.

More specifically, the GAO said, it found that some examinations were not conducted in concert with FDIC policies and that gaps in FDIC policies limited examination effectiveness. “For example, GAO found that managers sometimes did not clearly document how they concluded that banks had addressed recommendations,” the GAO report stated. “By improving adherence to agency policies, FDIC management could better address threats to capture in the examination process.”

Drilling even further down, the GAO said that although the deposit insurance agency has policies aimed at preventing post-employment conflicts of interest by workers (including examiners) who accepted positions at banks they once supervised, the FDIC has not “fully implemented a process for identifying when to review the workpapers of departing examiners to assess whether independence has been compromised.

“In particular, FDIC does not have a process for collecting information about departing employees’ future employment,” the report stated. “By revising its examiner-departure processes, the agency could better identify when to initiate workpaper reviews.”

GAO said four recommendations were made to the FDIC to address the findings, including improving documentation of banks’ progress at addressing FDIC recommendations and revising examiner-departure processes.

GAO report on Bank Supervision: FDIC Could Better Address Regulatory Capture Risks