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What do banks do when no one is watching? It's up to bank examiners to find out


High-profile bank failures in the last several weeks are putting the spotlight on bank examiners, the government employees who perform regular checkups on the country's financial institutions. Wailin Wong and Darian Woods from our daily economics podcast The Indicator From Planet Money looked into what can happen inside a bank when no one is watching.

WAILIN WONG, BYLINE: To understand how important bank examiners are, you only have to look at what happened 40 years ago with one group of financial institutions called savings and loans.

DARIAN WOODS, BYLINE: There was this government office in Arkansas, and it was responsible for supervising savings and loans in five states. And in 1983, this office was relocated to Texas, and a bunch of employees quit.

WONG: This left the office with just two bank examiners covering nearly 500 savings and loans and became this kind of natural experiment of what happens when there's suddenly no bank supervision. Kiah Haslett is managing editor at Bank Director, an industry magazine.

KIAH HASLETT: It was still on the bankers themselves to follow the rules. So this is like maybe a teacher leaving the classroom and the class, like, still actually knows what they're supposed to do.

WONG: And according to a research paper by two Federal Reserve economists, what ensued was basically the bank equivalent of throwing spitballs and drawing butts on the chalkboard.

HASLETT: These institutions grew much more rapidly. They entered deregulated and riskier lending spaces. They used riskier types of funding.

WOODS: And it took three years for the head office in Washington to act. In 1986, hundreds of examiners descended on the region for a six-week supervisory blitz, and some of these savings and loans hadn't gotten a comprehensive check-up in two or three years.

WONG: When the blitz was over, there was a huge surge in enforcement measures. The examiners also submitted over 500 criminal referrals to the Department of Justice.

HASLETT: There were some shenanigans that happened. The teacher left the classroom for three years, and everyone went wild. They just committed crimes because no one was checking to make sure they weren't committing crimes.

WOODS: So having a regular cadence of check-ups can help prevent everything from behavior that's, you know, risky but not illegal all the way up to outright crimes. And that's because bank examiners can be very thorough. They look at balance sheets and loan documents, written policies and even board meeting minutes.

WONG: They're combing through this material to figure out things like, is this bank liquid enough to handle all of its obligations? Is this bank following anti-discrimination laws on fair lending? What kinds of policies does a bank already have in place to detect fraud?

WOODS: Kiah says that problems can arise when a bank doesn't act on the early warning or when the regulator doesn't properly escalate issues. These are the questions that are now swirling around Silicon Valley Bank and its regulators.

HASLETT: You know, what kind of communication did SVB receive from examiners? How did examiners assess the risk that SVB was taking, and was that communicated that the management team needed to actually do something about it versus be aware of it?

WONG: Recent news reports say that as early as 2019, supervisors did issue several notices to Silicon Valley Bank. More information about exactly what unfolded on the examination side should come out in May. That's when the government will release its formal report on the SVB failure. Wailin Wong.

WOODS: Darian Woods, NPR News.

(SOUNDBITE OF BEACH HOUSE SONG, "SPACE SONG") Transcript provided by NPR, Copyright NPR.

Wailin Wong
Wailin Wong is a long-time business and economics journalist who's reported from a Chilean mountaintop, an embalming fluid factory and lots of places in between. She is a host of The Indicator from Planet Money. Previously, she launched and co-hosted two branded podcasts for a software company and covered tech and startups for the Chicago Tribune. Wailin started her career as a correspondent for Dow Jones Newswires in Buenos Aires. In her spare time, she plays violin in one of the oldest community orchestras in the U.S.
Darian Woods is a reporter and producer for The Indicator from Planet Money. He blends economics, journalism, and an ear for audio to tell stories that explain the global economy. He's reported on the time the world got together and solved a climate crisis, vaccine intellectual property explained through cake baking, and how Kit Kat bars reveal hidden economic forces.
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