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BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

DIVISION OF SUPERVISION

AND REGULATION

SR 19-9

June 3, 2019

TO THE OFFICER IN CHARGE OF SUPERVISION

AT EACH FEDERAL RESERVE BANK

SUBJECT: Bank Exams Tailored to Risk (BETR)

Applicability: This letter applies to (1) state member banks without a holding company and with

less than $100 billion in total consolidated assets and (2) state member banks affiliated with a toptier holding company that has less than $100 billion in total consolidated assets. 

The Federal Reserve has enhanced its process for determining the scope of the supervisory 

work performed in safety-and-soundness examinations of community and regional state member 

banks (SMBs). The enhanced process—Bank Exams Tailored to Risk (BETR)—combines 

surveillance metrics with examiner judgment to classify the levels of risk at an SMB within

individual risk dimensions, such as credit, liquidity, and operational risk. The SMB’s examination 

is then tailored to reflect the levels of risk present and minimize regulatory burden for the bank. 

BETR builds on the Federal Reserve’s overall risk-focused approach to supervision, 

whereby examiners and other supervisory staff identify risks to an institution and assess 

management’s ability to identify, measure, monitor, and control such risks. The enhanced process 

advances risk-focused supervision by: 

1. Establishing a suite of data-driven, forward-looking surveillance metrics based on 

various information sources, including the Call Report, to help classify each risk 

dimension for a bank into a high-, moderate-, or low-risk tier; and 

2. Tailoring examination work programs to align examination staff resources and 

activities more closely to a bank’s risk profile. 

The following is a brief description of BETR’s objectives, the surveillance metrics used to 

determine the scope of an examination, the risk-aligned examination work programs, and the 

implementation of BETR. 
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Objectives

BETR’s primary objectives are the following: 

1. Identify an SMB’s activities that are low risk and apply appropriately streamlined 

examination work programs to those areas, thereby conserving supervisory staff 

resources and minimizing regulatory burden. 

2. Identify an SMB’s high-risk activities and target them for enhanced supervisory 

attention, thereby directing supervisory resources to where they are most needed. 

3. For the remaining moderate-risk activities, implement examination work programs 

of average intensity. 

Surveillance Metrics

BETR’s surveillance metrics gauge the potential for an SMB to experience adverse 

outcomes, such as highly unfavorable financial trends, significant performance shortfalls, severe 

losses, or supervisory rating downgrades, over a 12- to 24-month timeframe, and under unfavorable 

market conditions. As such, the metrics assist examiners in classifying the levels of risk related to 

an SMB’s activities.1

 

For each risk dimension considered by BETR, the metrics classify the corresponding 

activity of an SMB into one of three risk tiers: high, moderate, or low. Low-risk activities pose the 

least potential for adverse outcomes to an SMB, while high-risk activities entail the greatest chance 

of unfavorable results. The following definitions generally apply: 

• High risk: Under unfavorable market conditions, such activities often lead to 

adverse outcomes, as described above. 

• Moderate risk: In unfavorable markets, these activities occasionally result in adverse 

outcomes. 

• Low risk: The expected incidence of adverse outcomes is low, irrespective of market 

conditions. 

The surveillance metrics’ design features are as follows: 

1. Data-driven: The information content, or predictive capacity, of the metrics is 

confirmed via data analysis. This feature involves the estimation and backtesting of 

the metrics using data from previous banking cycles. 

2. Forward-looking: The metrics gauge the risk posture of an SMB and its 

susceptibility to severe losses or substantial underperformance. This feature is 

supported by estimating the relationship between risk indicators at a given point in 

 

1 BETR’s surveillance metrics are a subset of the “Outlier Metrics” introduced in SR letter 15-16, “Enhancements to 

the Federal Reserve System’s Surveillance Program.” See also the Commercial Bank Examination Manual section 

entitled, “Federal Reserve System Bank Surveillance Program.”
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time and bank performance a year or two later, particularly under unfavorable 

market conditions. 

3. Granular: The metrics provide insight into individual risk dimensions. This feature 

is incorporated by developing the metrics separately for each risk dimension 

considered. 

Surveillance metrics provide examiners with a data-driven starting point for determining the 

scope of an SMB’s examination. In cases where examiners are aware of factors indicating that an 

alternative risk classification for a particular risk dimension would be more appropriate, they

should exercise supervisory judgment and adjust the risk tier during the scoping process. Examiners 

should then record their rationale in appropriate work papers and plan the examination work 

program accordingly. 

Risk-Aligned Examination Work Programs 

Examiners tailor examination procedures to the size, complexity, and risk profile of an 

SMB. The procedures that examiners perform should focus on developing an appropriate 

assessment of bank management’s ability to identify, measure, monitor, and control risk. 

For community SMBs, the scope of an examination work program for a particular risk 

dimension depends on a bank’s risk classification, as follows: 

• High risk: Examiners apply the full extent of examination procedures and conduct 

additional work as necessary, including independent verification and transaction 

testing, in order to reach, support, and document conclusions regarding the level of 

an SMB’s risk exposure and the adequacy of bank management’s effort to mitigate 

and manage risk. 

• Moderate risk: Examiners apply a subset of examination procedures, with a focus on 

evaluating an SMB’s key risk drivers and financial reports to confirm that risk is 

moderate. Independent examiner verification and transaction testing are applied to 

specific areas, but reduced relative to high-risk cases. 

• Low risk: Examiners apply a smaller subset of examination procedures than for 

moderate-risk cases, with a focus on evaluating an SMB’s key risk drivers and 

financial reports to confirm that risk is low. Independent examiner assessment of 

risk management is reduced relative to moderate-risk cases. 

Supervisory teams design the risk-aligned work programs for each risk dimension, resulting 

in procedural templates for general use in the examination process. The degree of differentiation 

between low-, moderate-, and high-risk work programs directly depends, in part, on the predictive 

capacity of a risk dimension’s surveillance metrics, as confirmed via backtesting. 

Examination procedures are often more bank specific for regional SMBs, reflecting their 

larger size and unique characteristics, with somewhat less emphasis on generalized procedural 

templates. Nevertheless, streamlined work programs are applied to low-risk activities at regional 

SMBs, and strong risk alignment is maintained in the examination process overall. 
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At each examination, the examiner-in-charge confirms the risk classifications on which 

planned work programs were based and, if needed, adjusts or expands the work programs. If initial 

discussions with management or additional information obtained during the examination indicates 

significant weakness in an SMB’s risk management or higher than anticipated risk, examiners are 

expected to modify the examination’s scope and work programs accordingly. All examination work 

programs will continue to include the review and verification of corrective action taken to address 

any outstanding Matters Requiring Immediate Attention or Matters Requiring Attention. 

Implementation

The Federal Reserve has a longstanding practice of allocating, in general, more resources to 

the review of supervised institutions with high-risk activities, while conserving resources at lowrisk cases. By enhancing the Federal Reserve’s ability to gauge the risk of a bank’s various 

activities, BETR facilitates a more data-driven approach to the risk tailoring of supervisory work at 

community and regional SMBs. 

Inputs and approaches utilized by the BETR program’s surveillance metrics are expected to 

evolve over time. The risk dimensions covered could change, as well. To help manage and enhance 

the program as it matures and grows, surveillance analysts assess the appropriateness of the metrics 

on a quarterly basis and update them as needed. Similarly, supervisory teams maintain and update 

the risk-aligned examination work programs. 

BETR’s surveillance metrics and examination procedures are currently in use for credit, 

capital, earnings, liquidity, market, and securities risk, while metrics and procedures for other risk 

dimensions, such as operational risk, are in various stages of development and will be deployed as 

work is completed. The examination staff hours suggested for different risk dimensions and levels 

are being updated to reflect the BETR program. 

In addition to examination scoping, BETR’s surveillance metrics also help monitor bank 

risk profiles between examinations. Examiners and other supervisory staff consult the surveillance 

metrics on a quarterly basis, watching for early signs of increased risk-taking, both at individual 

SMBs and across the industry. When the metrics point to emerging high risk, staff should formulate 

and execute an appropriate supervisory response, which in some cases could entail a bank 

examination. 

Data-driven metrics and timely financial data are important to the Federal Reserve and the 

implementation of BETR. Accordingly, the Federal Reserve reaffirms the importance and value of 

banks providing timely and accurate financial information via channels such as the Call Report. 
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Questions about BETR should be directed to Lily Zheng, Manager, Surveillance – Financial 

Trends, at (202) 973-6966, or Anthony Cain, Manager, Regional Bank Supervision, at (202) 912-

4377. Inquiries may also be submitted via the Board’s public website.2

Michael S. Gibson

Director

Cross Reference:

• SR letter 15-16, “Enhancements to the Federal Reserve System's Surveillance Program”

 

2 http://www.federalreserve.gov/apps/contactus/feedback.aspx.