Bank examinations are integral to the government’s supervision of the banking industry. A bank examination is an inspection of a bank or other financial institution by a federal or state regulator. The purpose of a bank examination is to assess the institution’s financial health and/or its compliance with applicable laws and regulations.
Bank examinations generally are non-public. Typically, an examination report is not shared beyond the regulator and the bank. However, when a bank is involved in a lawsuit, keeping such records confidential can be difficult. In a lawsuit, a party may seek copies of such records in the hope of using them as evidence as trial.
That’s where the bank examination privilege comes into the picture. The privilege is a federal rule that shields examination records, to an extent, in federal litigation.
The bank examination privilege is an evidentiary privilege. Evidentiary privileges exempt specific types of evidence from disclosure during a lawsuit. The bank examination privilege evolved from federal judicial decisions, and thus can be classified as a federal common-law evidentiary privilege. In many states, state law also shields examination records. The term “bank examination privilege” usually is understood to refer to the overarching federal rule, rather than the rule that exists in any particular state.
The privilege has a number of nuances that counsel should keep in mind when representing a financial institution in a federal lawsuit. We review ten of them below. A more comprehensive overview of the privilege can be found in our new treatise, The Bank Examination Privilege (American Bar Association 2017).
1. The Privilege Belongs to Regulators
The privilege belongs to regulators, not banks. Therefore, in a lawsuit, when a party asks a bank to turn over confidential examination records, the bank should promptly reach out to the regulator that conducted the examination. If the regulator asserts the privilege, one of two things may happen next. First, the bank’s adversary may back down. Second, the bank’s adversary may ask the court to override the regulator’s decision.
If the bank’s adversary asks the court to override the regulator’s decision, the bank can remain neutral and let the dispute play itself out between the regulator and the bank’s adversary. Often, however, the bank will actively work with the regulator to defend the privilege, and will submit arguments in support of the regulator’s position.
2. Courts Follow a Specific Procedure When Applying the Privilege
To resolve disputes related to the privilege, courts follow a specific procedure. First, the court considers whether the examination records fall within the scope of the privilege. Different judicial decisions use different wording to describe the exact boundaries of the privilege. In essence, the privilege protects an examiner’s confidential opinions and recommendations, and other deliberative aspects of the examination process.
The regulator bears the burden of showing that the records fall within the scope of the privilege. To determine whether the regulator has met this burden, a court may directly review the records, or a sampling of the records, in camera.
Next, if the records are privileged, the court will consider whether there is good cause to require disclosure of the records. The party seeking disclosure bears the burden of showing good cause. The good cause analysis usually focuses on five main factors: (1) the relevance of the records to the case; (2) whether the party can obtain the same information from other sources;
(3) the seriousness of the case; (4) the government’s role in the lawsuit, and (5) whether disclosure will have a chilling effect on future bank examinations.
In some cases, after conducting this analysis, the court makes an across-the-board determination that the privilege shields all, or none, of the sought-after examination records. In other cases, the court finds that the privilege protects some documents but not others, or covers particular portions of documents.
3. The Privilege Is Not Limited to ROEs
Often, at the conclusion of a bank examination, the examiner will prepare a formal report known as a Report of Examination, or ROE. Much of the case law regarding the privilege concerns the applicability of the privilege to ROEs.
However, the privilege is not limited to ROEs. The privilege can extend to any type of communication. When applying the privilege, the relevant question is not what form the communication takes. The relevant question is whether the substance of the communication reveals privileged information.
For example, the privilege can encompass:
- Regulator-to-bank communications other than ROEs, such as letters, e-mails, or oral communications;
- Internal agency communications that are not shared with banks;
- Bank-to-regulator communications, such as a response to an ROE; and/or,
- Internal bank communications that are not shared with regulators, such as internal bank e-mails discussing communications with an examiner.