Financial Services

The FDIC's Relationship Manager Program: A Word to the Wise

January 2006

By Christopher C. Gallagher*

In 2003, I delivered a keynote address to a closed meeting of District 1 of the Conference of State Bank Supervisors entitled, "Resource Regulation: The Road to Relevance." Urging the state-chartered bank supervisors to temper their time-consuming war over preemption with OTS and OCC, I respectfully suggested that they bend their energies towards regulating community banks with a new supervisory paradigm-one resembling the concept of "parent" rather than "policeman." I warned that with preemption under scrutiny, the OCC was likely to play "hardball" to show Congress that it could be as tough on provider misbehavior as any state attorney general. I urged the gathered state regulators not to ape the OCC by playing "me too," but to embrace a new and different regulatory attitude; a supervisory approach that recognized and reflected the realities of regulatory burden and smaller bank survival in today's super-competitive financial services arena.

My reasoning was simple. Unless their supervisory process were infused with the customized flexibility needed by smaller community banks to efficiently run their unique institutions, community banks cannot be expected to continue to compete effectively with their regional and super-sized brethren. I suggested that the regulators' smaller bank constituency was shrinking-handicapped by disparate regulatory burden and didn't need more. I asked that they adopt this new approach as a strategy to maintain the continued relevance of the dual banking system, by giving smaller banks the tools to successfully adapt to today's regulatory and competitive environment. They were polite and pleasantly receptive, but nothing seems to have changed, at least not at the state level. The FDIC on the other hand is actively addressing this problem in a number of innovative ways. One is its new "Relationship Manager Program." And because of alternating examination programs, the federal agency may even pull its state supervision counterparts along.


In its latest edition of Supervisory Insights, the FDIC outlines the new program for its regulated "public." For those interested in "looking under the hood," there is also an internal memorandum (dated September 30, 2005, Classification No. 6600, from Christopher Spoth, Acting Director, Division of Supervision & Consumer Protection) available on request (Contact: Louis Bervid, Sr. Examination Specialist, at detailing the Corporation's directives to its own examiners. Both pieces are must reading for community bank management.

After a successful pilot with 390 banks in eight states, the FDIC began full implementation of its Relationship Manager Program on October 1, 2005 . It is designed to strengthen relationships between the FDIC and bank management while improving the efficiency of its own supervisory process. But whatever operating efficiencies may redound to the FDIC, bank management must act quickly to ensure that this new program (which incorporates no changes in examination procedures) also contributes to bank operating efficiency. Why? Because if the RM program becomes merely another layer of regulatory oversight, it may do more harm than good.

The Corporation's recent sensitivity to the impact of increasing regulatory burden upon smaller community banks, is genuine. We can expect the FDIC to do its best to make it work. But the natural tendency of regulatory personnel towards cautionary and uniform behavior is always present. It is part of the FDIC's cultural DNA. Unless that institutional bias is effectively addressed and contained, the RM program could lead to more burden rather than less. And the only way to avoid that unintended consequence is to get engaged early in the program.

After all, this is about relationship. The FDIC cannot succeed alone. It is up to bank management to see that this program works efficiently for the bank. Only by working proactively to make the new program succeed can bank management turn this potential lemon into "lemonade."

The key to banking's successful role is lodged in the common-sense dynamic of the term, "relationship." Passively allowing FDIC Relationship Managers to shape this dynamic solely from their side is a losing strategy. Indeed, that approach is almost certain to get things off on the wrong foot. Worse, once a one-sided "relationship" moves in the wrong direction, it can harden into the continuing inefficiency of a dysfunctional partnership; not unlike a bad marriage. The outcome for both sides becomes "lose-lose" rather than "win-win."


A new product called a "Supervisory Plan" (SP) is to be developed by the "Relationship Manager" (RM) at the start of each examination cycle. Based upon the RM's risk assessment and other potential problem areas, the SP projects an overall supervisory strategy for your institution, including Risk Management, Compliance/CRA programs, and all specialty examination areas. Before the bank's SP is drafted and directions are set, bank management should meet with the bank's RM. They should share the bank's operational and compliance plans for the coming examination cycle. Early communication can shape the scheduling, substance, and the style of the entire examination cycle. So if you have not yet learned the identity of your RM, you should find out right away. Then CONTACT that person, signaling your interest in making the relationship work.

Everyone is familiar with the ingredients of a good relationship. Keep in mind the age-old question, "How long does one dance with a gorilla?" and that according to the ancient maxim, "It takes two to tango.


Beyond initial Contact, an informal refresher on the other "C's" of a good relationship may be in order for all CEOs.

1. Courtesy/Cordiality

RMs have been directed to become the regional point of FDIC contact with your bank. Absolute courtesy and cordiality are expected on their part. Banks should reciprocate in kind, conducting their communications in the same courteous and cordial manner. Only in the "safety" of such a dialogue can constructive relationship develop.

2. Candor/Completeness

While a "cat and mouse" relationship is intimate, it is clearly not wholly satisfactory for the "mouse." In any supervisory relationship, the bank is the mouse. Being less than candid or avoiding areas of discomfort (hoping they will not be discovered later) is a recipe for disaster. Worse, "divorce" is not available as an option. The only way out of a bad regulatory relationship is "death" by consolidation or worse. The banks themselves must set a tone of Candor and Clarity, and stick to it. This will make for a smoother relationship, building a Credibility "account" you may need to draw upon later.

3. Cooperation

The object of this program is to make the regulatory dynamic more efficient for both sides. Without such mutual efficiency, the program will have failed. In Supervisory Insights (referred to above), an examiner describes the "win/win situation" resulting when bankers "appreciate" the process and the RM role. (See Dan Langdon insert, "Perspectives from an FDIC Examiner," Supervisory Insights , Winter 2005, p. 25.) Close cooperation will improve efficiency. Without it, the opposite prevails. Think of dancing. It can be smooth or disastrously Clumsy.

This same examiner describes our last "C" as he talks about his sense of "ownership" of the banks in his portfolio. (Ibid)

4. Co-Ownership

The FDIC has now assumed its overall ownership of a critical issue for community banks, i.e. how does a bank stay small, be responsive to customer and community needs, and still compete with super-sized, commoditized competition, especially when ascending regulatory burden has an adversely uneven impact on it? The FDIC has addressed this problem in several ways (see this author's recent article "The FDIC and Part 363: Flexibility Without Forbearance"), and in so doing, has accepted its share of responsibility to keep the dual banking system strong. It is reaching for a regulatory flexibility that will enable banks to be both efficient and carefully regulated while remaining responsive to their community's needs, all without having to size up or possibly shut down existing services. Such adaptation will take hands-on, up-close and personal, customized, regulatory interaction. Reflecting this same attitude and concern, RMs are charged with seeking out and connecting with their assigned institutions. They can be expected to deal with bank line operations "as they find them." But banks must do their share too. It still takes "two to tango." There should be no pat formula for relationship regulation. Maintaining your banks' successful mix and style will require that you engage your RMs, and in an interactive way, gain their support for your way of doing business.

Resource regulation requires the regulator to act as a "resource" as well as an "enforcer." "Parenting" banks rather than "policing" them may not be the politically correct description of this new regulatory dynamic. Some may prefer the word "partnership." Whatever we call it, a well-functioning relationship will help mitigate regulatory burden now plaguing community banks by helping new regulatory requirements mesh efficiently with the banks' line operations.


The bottom line is that the supervisory relationship between bank and regulator isn't going to go away. Much of regulation's burden is beyond the control of both the regulator and the regulated. Working where it can, however, the FDIC has acted to make the process more efficient, more user friendly, and thus, more supportive. The regulatory environment requires community banks to adapt. This new process cries out for active cooperation, not apathy, and certainly not animosity. Community banks have every incentive to do their part in making it work. Adaptive efficiency in the new environment means survival. Thus, this situation must be managed not just endured. Smart managers will try to meet their regulators more than halfway, as they proactively commit to the success with their bank of this new relationship program. Banks should assume co-ownership of their "relationships." If they do not, this new program could become an institutionalized, one-sided relationship that will almost certainly make matters worse instead of better.

As the old maxim goes, "a word to the wise is sufficient."

* Christopher C. Gallagher is admitted in New Hampshire.

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