The Impact of Information Systems Audit Findings on Regulatory Ratings and Bank Supervision: An Analysis of FDIC and OCC Oversight Effectiveness

Posted: Aug 30, 2023

• Hamza Shahbaz Ahmad
  University of Missouri Kansas City
• Hamza Arif
  National University of Sciences and Technology (NUST)
• Komal Fatima
  University of the Punjab

Abstract

This research examines the significant impact of Information Systems audit findings on regulatory ratings and supervisory outcomes in the U.S. banking sector, with particular focus on FDIC and OCC oversight mechanisms. Through comprehensive analysis of 215 banking institutions and their regulatory examination records from 2020 to 2023, this study develops a quantitative model that demonstrates the critical relationship between IT audit results and composite regulatory ratings. The research introduces a novel Regulatory Impact Score (RIS) that measures the influence of various IS audit findings on supervisory outcomes across different bank sizes and complexity levels. Empirical results indicate that information technology-related findings account for 42% of rating downgrades in CAMELS composite ratings, with cybersecurity deficiencies representing the most significant contributor. Findings reveal that banks with material IS audit findings experience 3.2 times higher probability of regulatory enforcement actions and require 47% more intensive supervisory oversight. The study demonstrates that specific IS control weaknesses, including access management failures and system integrity issues, have disproportionately large impacts on regulatory assessments. This research contributes to both regulatory policy and banking practice by providing