Robert Fleetwood is part of the financial institutions group and is the head of the group's securities law practice area at law firm Barack Ferrazzano Kirschbaum & Nagelberg LLP in Chicago. Here, he talks about the increasing demands for capital and the trickle down impact of the Dodd-Frank Act, topics for the upcoming Bank Audit Committee Conference in June.
What are the kinds of questions you think audit committee members should be thinking about?
Many of our clients, particularly our private community banks, have recently been asking: “Where will we be in five years? What do we need to be thinking about?” With today’s regulatory environment, signs of recovery in the general economy and continued advances in technology, these are critical questions that all directors should be asking. I will be participating in a peer breakout focused on community banks at Bank Director’s upcoming Bank Audit Committee Conference to discuss some important issues for audit committee members. Capital is of particular importance for all banks and I will discuss potential future capital requirements and what institutions can be doing now. I will address the role of the audit committee in risk management and the emergence of full risk committees. I will also talk about the mergers and acquisitions process and what all organizations should consider, whether or not they may participate in an M&A transaction.
Two of my partners will also speak at the conference. Joseph Ceithaml will participate in a breakout session regarding best practices that audit committees should consider to improve performance and will touch on topics including committee responsibilities, charters, the agenda-setting process, communication between meetings and committee membership. Additionally, John Geiringer will speak on some important regulatory issues, including recent Federal Deposit Insurance Corp. lawsuits and what boards of banks can learn from them to improve their practices.
Will regulators require higher levels of capital in the future? How can community organizations access capital?
There continues to be debate about whether capital is king to a financial institution’s health and well-being, or whether other factors, such as liquidity, are actually more important. Regardless of one’s viewpoint, it is clear that regulators and investors place a heavy emphasis on capital levels and that this will continue into the future. Basel III, Dodd-Frank and the unquantified “regulatory expectation” will shape what future capital requirements will be for all institutions, regardless of size. Not only are higher capital levels expected, but the components of capital will also change, with a clear bias toward more permanent common equity. A key question for community banks is whether they will need to raise additional capital to implement their strategic plans and, if so, how will they raise the necessary amount. Many community banks have relied on directors and existing shareholders for additional capital. Changes to the private placement rules included in the recently adopted Jumpstart Our Business Startups Act (the JOBS Act) may make it easier for banks to solicit others in their community for additional capital.
Will Dodd-Frank have a significant impact on community banks? What do audit committee members need to know?
The Dodd-Frank Act has certainly played a significant role in financial institutions’ strategic planning over the past two years. However, there is still uncertainty over Dodd-Frank, with many questioning how it will be completely implemented and affect community financial institutions. There is also the potential impact of the upcoming elections and events outside the U.S. financial services industry. Almost two years after the enactment of Dodd-Frank, about 75 percent of the required rulemaking has yet to be completed. Of the rules that have been completed, only about half have become effective. Over the last six months, regulatory agencies have begun to promulgate some of the major systemic risk rules that primarily affect the largest financial institutions. Many of the controversial proposals that attract most of the media attention are geared toward these larger institutions, including the Volcker Rule, capital stress testing and the preparation of the so-called institutional “living wills.”
Many of the rules that will ultimately be developed under the Act will likely have a trickle-down effect on smaller institutions, either through actual regulation or prudential supervisory guidance. Additionally, regulators are currently focused on consumer compliance issues, with the new Consumer Financial Protection Bureau leading the way, and many of those rules are becoming more subjective in nature, making monitoring and ensuring compliance more difficult. With all of this uncertainty, all directors, including audit committee members, will need to closely monitor regulatory developments and continue to plan for increased regulatory and compliance costs.