An Update on Trade Groups’ Response to the Proposed Wal-Mart ILC.

Who Says It’s Relief? Trade Groups Take Issue with Proposed Bill

The latest version of regulatory relief legislation meandering its way through Congress is chock-full of burden-lifting measuresu00e2u20ac”in areas such as Bank Secrecy Act enforcement, call-report filing, privacy notices, and Home Mortgage Disclosure Act requirementsu00e2u20ac”that bankers say are desperately needed. But for one constituency, bank directors, a proposed wrinkle makes the bill’s title look like a misnomer.

Section 405 of the Financial Services Regulatory Relief Act, known formally as HR 3505, would give banking regulators the power to enforce written agreements requiring that directors dip into their own pockets to prop up a financially ailing institution. No “reckless disregard” or “unjust enrichment”u00e2u20ac”the present standards for such actionsu00e2u20ac”would be required. Rather, the agencies would be empowered to demand that bank board members sign agreementsu00e2u20ac”in connection with cease-and-desist orders, change-in-control agreements, or even applications for new charters or branchesu00e2u20ac”requiring them to pony up personal funds if a bank falls on financial hard times. Those same powers would also extend to other “institution-affiliated parties,” such as investors that own 10% or more of a banking company.

The provision has David Baris, executive director of the American Association of Bank Directors, seeing red. He says it amounts to the reversal of a 1989 law limiting personal liability of bank directors to instances of bad faith. “They’re calling it a clarification of the law, but it’s really a revocation,” he says. “It shouldn’t be in the regulatory relief bill. … The only relief it provides is for the regulators.”

Regulators have taken pains to note that directors couldn’t be required to fork over personal funds unless they first agreed in writing to do so. And not everyone is alarmed by the proposed law change. Walt Moeling, head of the financial institutions group at Powell Goldstein Frazer & Murphy LLP, an Atlanta law firm, says in 30 years of working with community banks, “I’ve never seen a case of director liability where there weren’t clear warnings,” and he doesn’t expect that to change. “It’s about paying attention and using common sense,” he adds. One observer notes privately that the AABD “needs good issues to rally its membership. … This fits that bill.”

But it’s not just Baris who’s concerned. The three big industry trade groupsu00e2u20ac”the American Bankers Association, Independent Community Bankers of America, and America’s Community Bankersu00e2u20ac””overlooked” the provision when examining drafts of the bill, concedes Chris Cole, ICBA’s regulatory counsel. Since Baris raised the issue, they’ve written to regulators, seeking to clarify agency positions. “There’s definitely a concern,” Cole says. “It’s another reason to be leery about serving as a bank director.”

The chief worry is that the provision might scare off qualified candidates from board service. The added risks also could discourage start-up activity and institutional investments in banks. For troubled financial institutions, the ramifications could be especially severe. Charles Thayer, chairman of Chartwell Capital, a bank management consultancy in Fort Lauderdale, Florida, contends that the section is a recipe for more, not fewer, bank failures, because it would discourage outsiders from coming to the aid of banks that need help.

Thayer, who once joined the board of a troubled Florida bank that was later sold, doubts he’d take the same risk if Section 405 became law. Regulators, he says, aren’t looking at the impact “from the perspective of the new management and new investors required to help banking regulators save troubled financial institutions.”

If the agencies were to use the powers aggressively, Baris says, individual directors could find themselves reaching into their own pockets to shore up a troubled institution’s capital levels. At best, they’d face a Catch-22 scenario. Since enforcement would require board members to first “voluntarily” sign an agreement to, for instance, maintain capital levels at a certain percentage of assets, they could simply refuse to do so and leave the board. But departing could place their investments in the institutionu00e2u20ac”and perhaps even the bank’s charteru00e2u20ac”at further risk.

In another scenario, a group of investors in a proposed new bank could go through the lengthy application process, and at the end have its approval made contingent on organizers’ willingness to maintain capital at 8% of assets for a certain amount of time. “Do they accept the condition or not?” Baris asks. “It’s a real Hobson’s choice.”

The most vexing part might be that no one really knows how the agencies would use their powers. Last September, officials from the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency testified in favor of the provision. First Senior Deputy Comptroller Julie Williams said it would address “anomalous” court rulings that require agencies in enforcement actions to prove that nonbank parties have been “unjustly enriched.” But she didn’t offer any tangible insight on howu00e2u20ac”or how frequentlyu00e2u20ac”the powers would be used.

In July, the FDIC, OCC, and Office of Thrift Supervision (the Federal Reserve hasn’t taken a public position) penned a similarly vague joint response to trade group inquiries. The section’s purpose is “to better protect the deposit insurance funds and the continued viability of an institution, and we have no intent to deter qualified individuals from services as directors,” the letter stated. “Banking policies should welcome the participation of [directors], … and we believe that enactment of this section is fully consistent with that goal.”

The FDIC and OTS didn’t respond to interview requests from Bank Director, and the OCC pointedly declined to talk about it.

With the regulators holding firm and the bill now being fine tuned in a House-Senate conference committee, don’t expect Section 405 to get nixed. “We might try to get it reworded. The trouble is, the bill has gotten so far along that it’s difficult to make any last-minute changes,” ICBA’s Cole says. While the groups are “obviously concerned about the provision,” the overall benefits of the relief bill are so great that “I can’t see that any of the trade groups would be willing to see the bill scrapped.”

That might be good news for banks; for their directors, only time will tell its true meaning.

u00e2u20ac”by John R. Engen

Five Trends That Will Drive the Banking Industry

What issues will have the greatest impact on the banking industry as it approaches 2010?

Flush with cash and capital, banks are positioning themselves to succeed in the future, according to a report by Deloitte & Touche USA. The precise details have yet to be filled in, but the challenges are clear today. Banks must cope with new markets, demanding customers, the quest for efficiency, and the need to control reputational and operational risks.

Despite the number of challenges facing the industry, opportunities for growth are plentiful and the major banks have already started the process of reinventing themselves to overcome industry issues.

According to Deloitte’s “Global Banking Industry Outlook: Growth Solutions in a Changing World,” the following five trends will drive the banking industry over the next three to five years:

– Globalize and consolidate: Spurred by falling crossborder investment barriers, banks will expand abroad by acquiring or merging with banks in other countries. Survey respondents see cross-border consolidation as an important aspect of globalization over the next three to five years, with 45% citing this trend. Nearly 47% of the banking industry survey respondents say outsourcing (through a mix of captive and outsourced functions) will be a top profit driver.

– Use technology and innovation to reconnect with customers: Slow growth in existing markets will push banks to reconnect with customers through a combination of state-of-the-art technology and personal service. Sixty percent of respondents believe the greatest effect on profits will come from technology-enabled products and services; and nearly 40% cite the use of technology to build strategic alliances with customers, partners and other stakeholders.

– Adopt a principles-driven approach to compliance: Half of the banking industry survey respondents see regulation as one of the top influences on profits. Within regulation, more than eight out of 10 respondents (82%) cite the implementation cost of compliance as having the greatest impact on profits. Nearly half (48%) see the risk of noncompliance as a top concern, and 46% cite the challenge of finding and training the right people.

– Better manage operational and reputational risk: Data privacy and security have become hot-button issues and will remain so for the foreseeable future. Fifty-eight percent of those banks surveyed cite operational risk as a key driver of future profits, more so than reputational risk.

– Adapt to the aging population: Banks in general have been slow to strengthen relationships with the baby boomers within their existing customer base by developing protection products and advisory services. As the current wave of retirees continues for the next 20 years, and as the earlier retirees age, the need for advice and products to help retirees drawing down assets in the face of uncertainty will only grow.

Banking Groups Renew Call for Congress to Block Wal-Mart Bank

The Independent Community Bankers of America (ICBA) and 31 other organizations, including individual banks, trade associations, and consumer advocates from various industries, renewed their call for Congress to urge the FDIC to deny Wal-Mart’s application for federal deposit insurance for an industrial loan corporation (ILC).

“In part due to Wal-Mart’s size, approval of its application would risk setting policy in this area on an unalterable course without allowing Congress to decide some of the fundamental questions at stake,” the groups said in a letter sent to Congress. “The policy implications raised here are too broad to allow that to happen.”

The letter is the latest action of the organizations that opposed a Wal-Mart bank during hearings held by the FDIC in April.

“Until Congress is able to pass legislation on ILC policy, we hope you will insist that the FDIC reject Wal-Mart’s application or at least hold it until Congress has had the opportunity to consider the policies at stake and legislate,” the organizations said in the letter.