How to Prepare Your Bank for an IT Regulatory Exam

Every 18 months, your community bank is required to undergo an IT regulatory exam with a federal examiner. The primary objectives of these exams are to evaluate the security, efficiency, and effectiveness of your bank’s IT infrastructure, data management practices, and cybersecurity measures.

Preparing for each IT regulatory exam should start 30 to 90 days prior to the date of your next exam. This guide from The Whitlock Co. will discuss what your teams can do to prepare.

Review Your Previous IT Regulatory Exam

A solid basis for your next IT regulatory exam comes from reports made by the last examiner. Look at what the previous bank examiner said in their report. What did the examiner say in their findings? What remedial actions did your community bank have to take? Did your bank follow through with the recommendations properly? Have your CTO or technology officer and your compliance leader review the exam thoroughly to assess what has been done since that report.

Make sure any remedial actions that were taken have been thoroughly documented. The next examiner will review those actions in detail and ask to see the reports.

Check for any changes in regulations or guidelines since the last exam. Your bank’s IT policies and procedures must be updated to reflect these changes.

See this checklist to examine your technology profile ahead of your IT regulatory exam. The examiner will ask to see that list.

• Hardware inventory
• Software inventory
• Network configuration
• Data management
• User access and authentication
• Data recovery and disaster recovery

Discuss & Review Any IT Incidents Since the Last Exam

The bank examiner will want to see any reports regarding any IT incidents since the last exam. You should see this in the pre-examination questionnaire.

Find and review these items from any IT incidents:

• Documentation and incident reports
• Root cause analysis
• Steps taken to remediate the IT incident
• Steps taken to prevent a similar incident in the future
• Policy review
• Process review
• IT asset review (software, hardware, network)
• Staff training and awareness
• Internal audit was undertaken after the incident
• Communication with regulators

Review the Pre-Examination Questionnaire

The federal official will send you a questionnaire well in advance of the next IT regulatory exam. Your team must be prepared to thoroughly answer each question in writing to satisfy that your community bank complies with current regulations.

Typical pre-examination questionnaires cover these topics, although the actual pre-examination questionnaire will likely be different than what’s stated here.

1. IT Governance and Management

• Describe the bank's IT organizational structure. Who is responsible for IT governance and management?
• Provide copies of key IT policies and procedures. How are they maintained and updated?
• Describe the bank's IT strategic plan. How is it aligned with the overall business strategy?

2. IT Risk Management

• How does the bank identify, assess, and manage IT risks? Provide recent risk assessment reports.
• What measures are in place to mitigate identified IT risks?
• Describe the incident response plan. How are IT incidents managed and documented?

3. Information Security

• What access control measures are in place to protect sensitive data and systems?
• Describe the encryption methods used for data at rest and in transit.
• What security awareness training is provided to employees?

4. Data Management and Protection

• How does the bank manage data governance and data quality?
• Describe the data backup and recovery processes. How often are backups performed and tested?
• What procedures are in place to respond to data breaches?

5. IT Infrastructure and Operations

• Provide an inventory of key IT systems and applications.
• Describe the patch management process. How are patches prioritized and applied?
• How does the bank manage third-party vendors? Provide copies of recent vendor risk assessments.

6. Regulatory Compliance

• How does the bank comply with relevant IT regulations and standards?
• Provide summaries of recent IT audit and examination findings. How were they addressed?
• Describe the processes for regulatory reporting related to IT and cybersecurity.

7. Business Continuity and Disaster Recovery

• Provide copies of the Business Continuity Plan (BCP) and Disaster Recovery Plan (DRP).
• How often are BCP and DRP tested? Provide recent test results and improvements made.
• Identify critical IT systems and describe how they are protected in the event of a disaster.

8. Cybersecurity Measures

• What tools and processes are in place to detect and respond to cybersecurity threats?
• Describe the vulnerability management program. How are vulnerabilities identified and remediated?
• How often are penetration tests conducted? Provide summaries of recent tests and actions taken.

9. IT Audit and Internal Controls

• Describe the internal IT audit program. How are findings addressed and tracked?
• What internal controls are in place to maintain the integrity and security of IT systems?
• Describe the change management process for IT systems and applications.

10. Technology Projects and Investments

• How does the bank manage IT projects? Provide examples of recent major IT projects.
• Describe the IT budget process. How are IT investments prioritized and approved?

Understand Your Current IT Risk

The bank examiner will want to know what risks, if any, your team has identified among your IT assets since the last IT regulatory exam. You should conduct a thorough IT risk assessment since that will be a major component of the bank examination.

The pre-examination questionnaire and the technology profile should give you strong starting points of conducting a thorough IT risk assessment.

When conducting a review, consider the following:

• Inventory all IT assets and systems
• Identify critical systems necessary for bank operations
• Identify potential vulnerabilities and threats
• Perform independent, third-party testing to assess your bank’s vulnerability
• Review access controls
• Review cybersecurity and firewalls
• Assess regulatory compliance
• Review past audits, mitigation strategies, and incident response plans
• Compare your bank’s IT risk management against industry benchmarks
• Conduct a vendor management assessment to make sure your downstream assets are secure
• Train and educate your staff on IT risks and vulnerabilities

Further Develop Your Information Security Program

After you assess your current IT risk, you should move forward with strengthening and developing your information security program. Your program encompasses policies, procedures, tools, and practices that collectively safeguard the bank’s sensitive information and IT infrastructure.

What vulnerabilities did you or an independent auditor find? You should prioritize the most vulnerable systems ahead of the IT regulatory exam and then report on which lower-profile vulnerabilities you will fix following the exam. Improvements can range from hardware and software updates to improved encryption protocols and more robust firewalls.

As you make changes, make sure you update policies and procedures. How often do you train staff? Are new employees properly trained to identify possible IT problems?

Have you thoroughly reviewed your vendors? Are they compliant with regulations? Sometimes, threats from outside of your community bank come from vulnerabilities in your third-party vendors that provide software and hardware.

Examine Your Cybersecurity Measures

Fully examine your community bank’s cybersecurity measures by conducting a comprehensive risk assessment. This involves identifying potential threats, vulnerabilities, and the impact of cyber incidents on the bank’s operations.

Following this, your team should review its existing security policies and procedures to update and align with current regulatory requirements. Regular internal and external auditing can find vulnerabilities and suggest improvements.

Another critical aspect is to test your incident response plan by conducting simulations and drills. This will help your team prepare in case of a cyberattack. A third-party independent auditor with this expertise is an ideal choice for this testing.

Make sure you continuously monitor systems for suspicious activities using advanced security information and event management (SIEM) systems. They should immediately notify the proper individuals of any suspicious activity.

Employee training is equally important. Regular training sessions (quarterly, if not monthly) should be conducted to make staff aware of the latest cybersecurity threats and best practices.

Review Data Protection & Privacy

What are your data protection and privacy protocols? A bank IT regulatory exam will look closely at how you classify and safeguard your customers’ information.

Conduct a Data Inventory and Classification

• Create a comprehensive inventory of all data assets, including customer information, financial records, and internal documents.
• Categorize data based on sensitivity and importance, such as confidential, internal, and public data.

Assess Current Data Protection Policies and Procedures

• Evaluate existing data protection policies and procedures to comply with relevant regulations, such as the Gramm-Leach-Bliley Act (GLBA).
• Assess the effectiveness of procedures for data collection, storage, processing, and disposal.

Implement and Test Security Measures

• Sensitive data must be encrypted both at rest and in transit.
• Review and enhance access controls so that only authorized personnel can access sensitive data.
• Verify that robust data backup and recovery processes are in place and regularly tested.

Review Your IT Governance & Management Protocols

Managing your community bank’s IT assets and protocols is essential to how your team responds to and improves your data security over time. A bank examiner will want to know how you oversee the technology, what action steps people take when an incident happens, and how leaders train employees to follow protocols. As your IT governance changes, all employees should be made aware.

1. Assess IT Governance Framework

• Evaluate existing IT governance policies for comprehensiveness, currency, and alignment with your bank’s strategic objectives.
• Review the organizational structure to ensure clear roles and responsibilities for IT governance. Verify that there is appropriate oversight by the board of directors and senior management.
• Verify that the IT strategy is aligned with the overall business strategy and that there is a clear roadmap for IT initiatives and improvements.

2. Evaluate IT Management Processes

• Assess the effectiveness of project management practices, including project planning, execution, monitoring, and closure. There should be a process for prioritizing IT projects based on strategic importance and resource availability.
• Review change management protocols to see that oversight of the IT environment is controlled, documented, and approved by relevant stakeholders.
• Evaluate the processes for identifying, assessing, and managing IT risks. Procedures for regular risk assessments and risk mitigation strategies must be in place.

3. Review IT Policies and Procedures

• Assess IT security policies to address current threats and vulnerabilities. Verify the implementation of access controls, encryption, and incident response protocols.
• Review data management policies, including data classification, protection, retention, and disposal. Comply with relevant data protection regulations.
• Ensure there are procedures in place to monitor compliance with regulatory requirements and industry standards. Show that the bank conducts regular audits and assessments.

4. Assess Performance and Metrics

• Evaluate the key performance indicators (KPIs) and metrics used to measure the effectiveness of IT governance and management. Measure the metrics for system uptime, incident response times, project completion rates, and user satisfaction.
• Review processes for continuous improvement, including how feedback is collected and used to enhance IT governance and management protocols.

Perform a Vendor Risk Assessment

Vendors can present challenging IT risks for your community banks. From third-party payment systems and your bank’s app to a login portal and HR software, you must assess all of your third-party IT vendors to make sure they don’t pose a risk to your bank’s cybersecurity.

Does your internal email system screen for phishing emails and send them spam? Do your computers scan downloads for viruses? Can your app withstand a cyberattack? These are just some of the things you need to discuss and assess with your technology team ahead of a regulatory IT exam.

1. Identify and Classify Vendors

• Create a comprehensive list of all vendors providing IT services or handling sensitive data.
• Classify vendors based on the level of risk they pose. Factors include the type of data they access, the services they provide, and their overall impact on the bank’s operations.

2. Gather Vendor Information

• Develop and send detailed questionnaires to vendors to gather information on their security practices, policies, and controls.
• Request relevant documentation from vendors, such as security policies, compliance certifications, audit reports, and incident response plans.

3. Evaluate Vendor Security Practices

• Review the vendor’s security policies and procedures to make sure they align with industry best practices and regulatory requirements.
• Assess the vendor’s access control measures, including user authentication, authorization, and monitoring practices.
• Evaluate how the vendor protects data at rest and in transit, including encryption methods and data loss prevention measures.

4. Assess Compliance with Regulations

• Ensure the vendor complies with relevant regulations such as GLBA and other applicable laws.
• Verify the vendor’s compliance certifications, such as ISO 27001, SOC 2, and PCI DSS, if applicable.

5. Review Incident Response and Recovery Plans

• Evaluate the vendor’s incident response plan so they can effectively detect, respond to, and recover from security incidents.
• Review the vendor’s disaster recovery and business continuity plans for maintaining operations during and after a disruption.

6. Analyze Risk and Document Findings

• Analyze the collected information to identify potential risks associated with each vendor.
• Assign a risk rating to each vendor based on the severity and likelihood of identified risks.
• Document all findings, including identified risks, risk ratings, and recommendations for mitigation.

7. Develop and Implement Mitigation Strategies

• Develop risk mitigation plans for identified risks, including specific actions vendors need to take to address deficiencies.
• Update contracts and service level agreements (SLAs) to include specific security and compliance requirements for vendors.

Review Internal & External Audit Processes

How often do you run internal and external audits for your IT assets? The Whitlock Co. strongly advises running an internal and external audit in between your regulatory IT exams. These audits will make sure you are prepared for the exam and that any deficiencies your community bank has are remedied following the examiner’s findings.

Evaluate the scope, frequency, and comprehensiveness of both internal and external audits. This includes checking that all critical IT systems, processes, and controls are regularly audited. You must also address and resolve any issues noted by the examiner while keeping your IT assets and processes within regulatory requirements and industry best practices to mitigate risks.

Internal Audit Review

• Internal audits cover all critical IT areas, including cybersecurity, data protection, and system integrity.
• Verify that audits are conducted regularly, following a predefined schedule.
• Confirm that all previous internal audit findings have been addressed and corrective actions have been implemented.
• Ensure thorough documentation of internal audit processes, findings, and actions taken.

External Audit Review

• Check the credentials and expertise of the external audit firm, ensuring they are qualified to assess IT controls.
• Ensure external audits are aligned with regulatory requirements and industry standards.
• Review the scope of external audits to ensure they comprehensively cover all critical IT functions.
• Check that recommendations from external audits have been implemented and documented.

Contact The Whitlock Co. to Partner With an Independent Auditor

The community banking and cybersecurity experts at The Whitlock Co. can audit your IT assets and processes to

Contact The Whitlock Co. to request a consultation today.