An Audit Report on the Department of Banking
July 2009
Report Number 09-043
Overall Conclusion
Overall, the Department of Banking (Department) complies with applicable statutes, administrative rules, and Department policy in monitoring the safety and soundness of state-chartered commercial banks and overseeing the commercial banks identified as having a poor or deteriorating financial condition.
However, the Department has been unsuccessful in conducting all of its bank examinations in a timely manner in accordance with Department policy. Six (46 percent) of 13 examinations that auditors tested were conducted an average of 26 days late. It is important to note that none of these 6 examinations was for a bank with a rating of 3, 4, or 5. (Bank ratings range from 1 to 5, with a rating of 1 indicating the strongest performance and a rating of 5 indicating the most critically deficient level of performance.) According to Department management, the Department conducted these examinations late due to a lack of experienced examiners. The Department's goal is to employ 56 commissioned examiners, but it employed only 24 commissioned examiners as of March 11, 2009. The Department also employed 52 non-commissioned examiners, 65 percent of whom are eligible to begin the commissioning process.
The 81st Legislature appropriated $6.3 million to the Department for the 2010-2011 biennium for 14 new senior bank examiner positions and for bank examiner retention and competitive salaries. In addition, House Bill 2774 (81st Legislature) transformed the Department, the Office of Consumer Credit Commissioner, the Department of Savings and Mortgage Lending, and the Credit Union Department into self-directed and semi-independent agencies effective September 1, 2009. The bill removed the agencies from the legislative budgeting process, and each agency's budget will be adopted and approved only by the policy-making div class="aboutText" of the agency. The bill also requires the State Auditor's Office to contract with each agency to conduct financial and performance audits.
A limitation on the scope of this audit prevented the State Auditor's Office from fully determining without qualification whether the Department is performing its monitoring duties. Because the Department has cooperative agreements with the Federal Deposit Insurance Corporation and the Federal Reserve Bank, the State Auditor's Office was required to request access to information that the agreements determined was confidential. The Federal Reserve Bank granted the State Auditor's Office conditional access to the confidential information for the banks for which the Federal Reserve Bank is the lead oversight entity. However, the Federal Deposit Insurance Corporation did not permit the State Auditor's Office to access information necessary to address the objectives of this audit. The denial of access to certain records limited the scope of this audit.
The Department ensures that its bank examiners are adequately trained, independent, and evaluated. Based on the administrative and enforcement actions auditors reviewed, the Department complies with applicable statutes, administrative rules, and agency policy in overseeing banks with a poor or deteriorating financial condition. The Department also has been accredited by the Conference of State Bank Supervisors' Performance Standards Committee since October 1993, and it has continued to meet the standards of the accreditation program and comply with that program's policies and goals.
Auditors identified opportunities for the Department to strengthen controls in areas such as ensuring that the Department processes examination reports in a timely manner, updates its training policy to reflect current practices, submits exception monitoring results to the Department's Director of Bank and Trust in a timely manner, and ensures that its consistently contacts banks within required time frames between examinations.
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