Examiner skills start here: an interview with William Spaniel
In addition to wide-ranging administrative, budgeting, and planning responsibilities at the Division of Banking Supervision and Regulation, Deputy Associate Director William Spaniel oversees the Federal Reserve’s supervision staff development function at the Board of Governors and its coordination with the 12 Federal Reserve Banks.
In October, RMA’s Director of Professional Development Ken Shipley interviewed Spaniel to learn more about the Fed’s basic examiner education, its continuing professional development program, just-in-time learning, and how skill development includes technical, management, and leadership capabilities.
KS: How would you summarize the Federal Reserve’s philosophy on
WS: Training and continuing education, especially for the supervision and regulation function, are critical strategic initiatives. Oversight of the program is provided by a committee of senior officers responsible for staff development as well as our core supervisory processes. This committee ensures that our training programs are aligned with the supervision function’s goals, priorities, and core competencies. It’s important that our business lines gain value from our training investment and from the skills and knowledge we give to examiners and other staff. In fact, about 10% of our annual operating budget is invested in professional development, which I believe is consistent with current practices for organizations that value training and staff development.
Possibly our heaviest training investment is in the assistant examiners we hire from undergraduate and graduate schools. Our primary training program, revamped in 1998, is designed for these graduates, as well as people who have either some prior banking experience or MBA degrees. This two- to three-year curriculum includes two proficiency tests and leads to a commission as a Federal Reserve Examiner.
Over the past few years, however, we’ve seen a growing need for continuing education for commissioned examiners as well as for our analytical, policy, and officer staffs. In addition to having critical examination roles, all these people are involved in non-examination activities that are vital, given the increasingly complex and sophisticated products and risk management techniques used in the marketplace. It’s important to understand the dynamics of these products and techniques to understand how banks are actually managing credit, market, operational, and other risks.
In addition, the Revised Capital Accord (Basel II), the USA PATRIOT Act, Graham-Leach-Bliley, Sarbanes-Oxley, and other changes required our staff development function to recognize the need for a self-directed program of continuing education throughout a supervisor’s career. Continuing education includes post-commission seminars, courses, conferences, and work experiences that help to pass on lessons learned. These forums also target emerging issues, new regulations, and the increasing complexity at all financial institutions.
KS: Does continuing education carry a requirement for, say, a number of hours per year?
WS: Supervision’s Continuing Professional Development (CPD) program isn’t structured the same as continuing education for CPAs or CFAs. We look more to individual managers and staff to assess learning needs, development plans, and areas of interest. Nationally, we try to provide insight into potential skill gaps, issues on the horizon, and emerging areas that will require additional or enhanced skills.
Ideally, professional development is a joint effort between managers and individuals to map out a career path that includes continuing education. For example, while CPD doesn’t lead to certification, we encourage all staff to have a learning plan and to implement at least some element of that plan annually.
Of course, we don’t confine CPD to seminars and courses. Work experience is an important part of our program–moving to the next level of complexity in an area or institution, conducting a broader credit risk management or similar analysis, speaking at a seminar, or teaching a course are all learning experiences in the CPD program.
For staff development professionals, the primary focus of CPD is to ensure that people are aware of opportunities. We have a national online CPD catalog that allows users to search for system courses, vendor-sponsored courses/conferences–RMA’s Operational Risk 101 is in the catalog–and courses offered by other regulatory agencies. Searches can be launched by subject matter, by seminar, or even by examination assignments and other internal opportunities.
KS: How have training delivery methods changed in recent years. and what additional methods are you looking at for the future?
WS: I’m proud to say delivery methods have advanced quite a bit. As part of our 1998 review and update, we shifted to a case-study-based curriculum in which staff perform actual elements of their work. Case studies are based on past examinations, lessons learned, supervisory issues, and critical business-line needs. We’ve gained a much more participatory and group-oriented learning forum. In addition, we developed a series of computer-based self-study programs that provide basic information and knowledge about current supervisory practices and regulations.
We also defined some post-classroom learning experiences and on-the-job training–an integral part of staff development. In many ways, the most valuable training experience may be what examiners actually do on the job–interacting with mentors and more senior examiners.
We want to help examiners maintain their skills, acquire more specialized skills, and have ready access to training materials and reference tools. We use just-in-time training/videoconferences to address emerging issues or new requirements and also provide our classroom materials online as reference tools. We’ve developed a number of online courses. One course, an operational risk learning tool, takes the operational areas of a bank and defines appropriate control environments and exam procedures, lists red flags to watch for, and identifies next steps to take if the examiners see weaknesses. This tool can be used successfully in both the classroom and the field as an effective method to deliver critical information and knowledge.
Even as we move to these new venues, we won’t abandon the classroom. Having different examiners share their experiences in a classroom setting is crucial to the overall program. We have a responsibility to teach people about the Federal Reserve’s culture–not only how we do things at the Fed and how supervisors look at situations, but also what we value as an organization. I think that’s best accomplished through on-the-job or face-to-face training.
KS: Do you have any Webinars, in which a live instructor works with students using audio and a PC hookup?
WS: We’re beginning to go down that path. Next year we’re going to pilot one of our core courses in a modified Webinar format. If it’s successful, we will look at other courses suitable for Web-only or blended learning.
Our first blended learning course debuts this year. The first week of the course is presented online. While not necessarily presented in real time, the instructor is available through an e-mail bulletin board students will check daily Students get basic concepts and the course foundation online using case studies, questions and answers, knowledge checks, and self-tests; they also communicate with their virtual classroom colleagues through a chat room. The following week, all students are onsite for actual classroom work that builds on their online learning.
There’s great potential in online learning: Information can be continuously available even after the course ends, there may be significant cost savings, and the information can be used in other courses and formats.
KS: About how many people are you training a year?
WS: Essentially, we run a small university. The Federal Reserve has approximately 2,500 employees in bank supervision. We train about 3,000 students each year, including videoconferences, online lessons, and classroom events. Obviously, some staff take more than one course each year. We also send students to FFIEC schools and other programs, so the total number of students attending classes in any year can be as high as 4,500.
KS: Which issues are uppermost for 2004, and how is staff development assisting examiners in assessing banks ‘preparedness to deal with these issues?
WS: There are quite a few, but let me start with some issues that shouldn’t surprise anyone: corporate governance, internal controls, and the roles and responsibilities of boards of directors and management. This requires focusing some training on basic supervisory skills and processes–transaction testing to ensure that banks have appropriate controls in place, testing bank policies and procedures against actual controls, reviewing segregation of duties, and assessing management and board oversight. Our Center for Online Learning has provided an online operations learning tool that includes an overview of each operational area, a summary of common internal controls and risks, a listing of red flags for each area, a case study and lessons learned exercise, and some general examination guidance and procedures.
Contingency planning and emergency preparedness are other important issues. We have hosted a number of videoconferences and seminars related to these issues and to the guidance that all the banking agencies have issued. Our IT examiners are reviewing contingency and backup plans, and I think that effort will continue to be essential in assessing banking organization preparedness.
We’re also waiting to see how other issues develop–the USA PATRIOT Act and enhanced regulations regarding money laundering and bank secrecy are still forthcoming. As these regulations are issued, we need to get training materials in the examiners’ hands–just-in-time training, videoconferences, CDs, and the Web are all options for doing so. In many cases, though, training will harken back to good controls, understanding the business, and understanding how that business and its risks are being managed.
In the credit risk area, I don’t think we’ll ever get away from cracking some loan files and testing some transactions to make sure the organizations are following the procedures and policies they have in place. Of course, we also want to see how banks manage credit risk in general and how they assess risks within their portfolios.
Supervision becomes more complex as credit risk models grow more robust and more sophisticated and as the use of FICO scores, credit risk, operational risk, and economic capital models expands. We will need to give most examiners some new skills and a basic foundation for better understanding these models and the assumptions they use. We’ll also need to give them specialized quantitative and analytical skills, either through expertise developed in-house or purchased in the marketplace. I think there will be a small but significant cadre of sophisticated quantitative analysts who will serve as a system-wide resource for the most intensive quantitative aspects of supervision. At the same time, the bar will rise for many examiners, and we will need to train them so they will be able to interpret what the quants are telling them about the use of credit risk models at banking organizations.
Operational risk is another important issue. We’ve already sent a number of people to RMNs Operational Risk 101 class. Since many of the ops risk models are still in the developmental phase, we will put some basic training in place in the near term to expand examiners’ knowledge and understanding of these models.
KS: Given the discussions around Basel II, what plans do you have for training the staff and the examiners for the impact of the revised Accord?
WS: Basel II looms large for staff development. We’re revamping our lending courses from a loan analysis concept to a credit risk management concept, to look at credit risk from a portfolio perspective. We’ll be adjusting our core curriculum to create a foundation in the risk management and capital allocation techniques embodied in Basel II as well as a basic understanding of the more quantitative and model-based approaches envisioned by the Accord. We’re also exploring multiple delivery channels to meet the need for enhanced skills at all staff levels, given the broad long-term effects of Basel II. When they first appeared, credit-scoring models weren’t used across all institutions, now they’re in wide use within organizations of all sizes. I think, over the long term and as applicable to each financial institution, the same will prove true with Basel II and risk management processes in general.
A group of Fed practitioners working on the Accord is also thinking ahead to determine the skill sets and training we will need once the Accord is final. We’re developing competencies within this staff, which will be available as system-wide resources to all 12 Reserve Banks. For now, most of this expertise is focused on refining the proposal. At the same time, we will continue to develop and deliver the training necessary to effectively supervise under the guidelines and requirements of a revised Capital Accord.
We must decide the necessary baseline understanding to ensure that our examiners can effectively supervise and that they will know when to call in the experts to assess models or more complicated issues. As the Accord develops, that’s a moving target, but I’m confident that we will be prepared with the right skills and the right training program.
KS: As you probably know. RMA developed a diagnostic assessment of credit skills in the early 1990s, and now we’re developing a credit certification exam process. What are your thoughts on certification and what impact do you think that’s going to have on the industry over a five- or 10-year horizon?
WS: We encourage staff to pursue certifications through our continuing professional development program. We have the essence of a certification process for our examiners–through the core curriculum, on-the-job training, and proficiency tests–that culminates in a commission as an examiner.
Many of our examiners already hold CFAs, CISAs, etc. Going forward, the credit risk certification may become another standard of excellence in the industry and with regulators.
KS: As your examiners visit banks and conduct exams, what feedback are you hearing about training, and what areas of training are coming up the most?
WS: We’re concerned whether banks will have the resources and skills they may need going forward, especially in the larger, more complex organizations.
We often compete with banks for the same people and training. For example, we use resources from RMA and other commercial enterprises to support our curriculum and continuing education programs. We also are finding that people who have private-industry experience and skills can be very helpful to us in supervision, and hiring that expertise can sometimes be more effective than developing it on our own. The reverse also is true: Private industry often seeks out Federal Reserve staff with critical skills to fill key positions. While we try hard to retain our stall, it is good to know they are valued in the private sector as well. I don’t know that we’ve often criticized banks for insufficient training programs, and I suspect that’s because they have appropriate training programs in place.
KS: In the almost two years since RMA developed eMentor[TM], 150 institutions as well as regulators have signed on to use the product. How are your examiners using eMentor?
WS: We signed up for eMentor and make it available to our 1,200 field examiners to use in portfolio and credit reviews. We also make it available to all our supervisory staff for special studies and industry comparisons. We refer to it in the classroom, and it’s part of our credit analysis courses. I believe the Shared National Credit program also uses eMentor. It’s one of several tools our examiners find helpful to support their assessments of credit and credit risk in institutions.
KS: Any, final words of advice or things we might not have covered to our members in the risk management training arena?
WS: Risk management is a complex and evolving facet of the financial services industry. It includes such a broad array of organizational issues–from internal controls to new product development, strategic planning, and quantitative portfolio analysis. In many ways, risk managers are akin to supervisors; they must have a broad understanding of everything–at least enough understanding to be able to discuss and analyze a subject well. Training in risk management is critical to us as we supervise an increasingly complex and ever-changing industry. I can’t overemphasize the importance of career-long learning and development; it’s more important than ever for supervisors, risk managers, and bankers.
We often cite a statistic that the amount of information doubles every five or six years. It’s just incredible. All of us need to be able to take the essential information from the large volume of data out there and use it to improve our performance and skills. Our job in staff development is to make that easier and to focus people on what’s critical–we’re struggling with that as much as anyone is. Of course, our staff and examiners are excellent at working in an ever-changing environment, and that’s fortunate, because the environment is going to continue to change.
Shipley can be reached at firstname.lastname@example.org.
Shipley is director of Professional Development at RMA–The Risk Management Association; Foster is editor of The RMA Journal.
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