Josh Schilowitz

COVID-19 has driven an unprecedented uptick in unemployment claims[1] and forced many employees to work remotely for the foreseeable future. While twenty-first century technology mitigates the impact of mandatory telework in some fields, others are either fundamentally incompatible or otherwise severely impaired.  The nature of the effect on the quality of American bank examinations is one uncertain question for now.

Federal agencies tasked with regulatory oversight of financial institutions, such as the Federal Deposit Insurance Corporation (“FDIC”), the Office of the Comptroller of the Currency (“OCC”), and the Consumer Financial Protection Bureau (“CFPB”), are responsible for carrying out examinations. The general purpose of bank supervision is to promote the health of the financial system. For example, the FDIC utilizes a rating system known as “CAMELS” to assess an institution’s soundness and stability.[2] CAMELS stands for: capital adequacy, asset risk, management quality, earnings, liquidity risk (or overall asset and liability management), and sensitivity to market risk. Each institution is given a 1–5 rating for each specific area and an overall 1–5 rating, 1 being the safest and 5 being the riskiest. Although confidential, bank ratings are still consequential because regulators have a number of formal and informal tools to compel changes at supervised institutions.[3]

 Federal regulators typically perform on-site examinations and are often stationed at the largest financial institutions full-time. In the wake of COVID-19, bank examiners have moved to remote examinations. For example, the FDIC and CFPB, among others, issued a ban on in-person exams until the end of March.[4] Much of the examiners’ duties are amenable to telework. Electronic document review, listening to calls, and meetings can all be performed online today with little effect on work-product.[5]

However, in-person examinations have benefits that remote work cannot provide. Long-term placements inside an institution allow regulators to understand the day-to-day operations better than remote work. Moreover, on-site examiners can develop personal relationships with employees in order to understand workplace politics and office hierarchies. On-site exams can simply provide a clearer window into a financial institution’s regular operations than a “work from home” examination. When speaking about monitoring day-to-day operations and transaction testing, Julie Hill, a professor at the University of Alabama School of Law said that, “[t]here’s really not a substitute for in-person examination.”[6] When specifically referring to liquidity, she stated, “[i]t’s easier to hide a distressed condition when the examiner is not there looking you in the face.”[7] Perhaps partially motivated by these concerns, the Federal Reserve recently announced that it will halt almost all examinations of banks with less than $100 billion in assets and postpone exams of banks above that threshold depending on how burdensome scrutiny would be during the pandemic.[8] Furthermore, Fed oversight requires a “stress test” in which banks model their performance under various hypothetical environments. COVID-19 is an authentic extreme environment for the financial system, so what value do “extreme stress” predictive models have currently?

On-site exams have had their issues, however. One particular problem is regulatory capture, a process by which an institution “captures” regulators and molds their interests to the institution’s benefit. This process is insidious because industry or institutional goals often do not align with the public good. James Kwak describes two forms of capture: material capture and cultural capture.[9] Institutions materially capture their regulators “by several mechanisms in addition to bribes. Regulatory agencies may be dependent for funds on the firms they regulate; firms can provide support to legislators, who then apply pressure to agencies through oversight committees; or individual regulators may be attracted by higher paying jobs in the industry they oversee.”[10]

The materialist account does not completely reflect the regulatory reality. Nonmaterial pressures can subtly affect regulators’ judgment as well. Kwak calls this “cultural capture.” Regulatory outcomes depend not only on ideological positions and analytical thinking, “but also on the nonrational pressures that arise out of the administrative process.”[11] Kwak cites “identity, status, and relationships” as contributing to the cultural capture of a regulator.[12] In short, regulators are susceptible to adopting the positions of those whom they identify with, whose status they respect, and with whom they share a personal relationship.

An illustrative example of cultural capture is the case of Carmen Segarra and Goldman Sachs. In 2011, Segarra worked as a bank examiner for the New York Fed and presented her findings that Goldman lacked a firm-wide policy to mitigate conflicts of interest.[13] The senior Fed official permanently stationed at Goldman disputed Segarra’s report and somewhat inexplicably concluded that Goldman’s watered down code of conduct sufficed as a firm-wide conflicts policy.[14] As documented in a ProPublica report, this incident raises serious questions of regulatory capture at the Federal Reserve. Moreover, a prescient outside report on regulatory capture at the Federal Reserve Bank of New York had already found that senior bank regulators had become too cozy with the institutions they set out to police and lacked necessary skepticism.[15] In the words of an in-house bank examiner, “[w]ithin three weeks on the job, I saw the capture set in.”[16] In response to the coziness of permanent in-house examiners at banks, the OCC mandated shorter physical placements at banks and reduced the number of on-site examiners.[17] Regulators recognize that in-house examinations carry a serious capture risk.

Temporary work-from-home policies may provide an opportunity to study more distant and detached forms of bank regulation. As examiners move into home offices and are forced to pore over documents without the constant presence of financial institution employees, perhaps a more objective perspective can be applied. Without the trappings of normal office interactions and associations, bank examiners can better avoid the soft pressures of unconscious bias. A regulator may be more likely to have an uncomfortable conversation remotely, to take a second look at the data, and to avoid an insider massaging unexpected discoveries. Professor Hill’s concerns about the weakened rigor of off-site supervision may be moderated by a reduction in examiner capture spurred by physical distance. While regulators seem to be taking a hiatus from supervision during the pandemic, working from home may actually present a unique chance to escape the cocoon of cultural capture.



[1] Quoctrong Bui & Justin Wolfers, More Than 3 Million Americans Lost Their Jobs Last Week. See Your State.,  N.Y. Times (Mar. 26, 2020), [].
[2] Risk-Based Assessments, Fed. Deposit Ins. Corp., [].
[3] See, e.g., Formal and Informal Enforcement Actions Manual, Fed. Deposit Ins. Corp., [].
[4] Evan Weinberger, Bank Exams May Lose Punch as Coronavirus Restrictions Linger, Bloomberg L. (Mar. 18, 2020), [].
[5] Id.
[6] Id.
[7] Id.
[8] Christopher Rugaber, Fed to suspend some bank supervision during viral outbreak, ABC News (Mar. 24, 2020), [].
[9] Daniel Carpenter & David Moss, Preventing Regulatory Capture Special Interest Influence and How to Limit It 75, 79 (2013).
[10] Id. at 75.
[11] Id. at 76.
[12] Id. at 80.
[13] Jake Bernstein, High-Level Fed Committee Overruled Carmen Segarra’s Finding on Goldman, ProPublica (Dec. 29, 2014), [].
[14] Id.
[15] David Beim, Report on systemic risk and bank supervision 8 (2009), available at: [].
[16] Id.
[17] Emily Stephenson, U.S. regulator to rotate bank examiners, move some out of firms, Reuters (May 28, 2014), [].