Could a Republican President Mean More M&A Activity?


Banking-Industry-8-12-15.pngWith the first prime time Republican primary debate of the 2016 election cycle in the rear view mirror, we have all gotten an inkling of what the candidates think about the banking industry. I did take particular note of Senator Marco Rubio when he stressed the importance of repealing the Dodd-Frank Act. As Commerce Street Holdings’ CEO shared in an article on BankDirector.com, “many bankers feel that given the legislative and regulatory environment coupled with low rates, low margins, low loan demand and high competition, growth is very difficult.”  So repealing Dodd-Frank is a dream for many officers and directors, and Rubio is echoing their concerns.

Senator Rubio’s comments build on those of former Texas Governor Rick Perry, who recently laid out a sweeping financial reform agenda earlier. He believes the biggest banks need to hold even more capital—or Congress should possibly reinstitute elements of the Glass-Steagall Act. While his campaign appears to be winding down, I do agree with his call for government to work harder to “level the playing field” between Wall Street banks and community institutions.

With so much political scrutiny already placed on banks, it is interesting to think of the pressures being placed on institutions to grow today. On one side, you have politicians weighing in on how banking should operate. On the other, regulatory and investor expectations are higher now than in recent years. Buckle up, because I believe the coming election will only further encourage politicians with opinions, but little in the way of detailed plans, about “revitalizing” the economy.

Against this political backdrop, today’s business environment offers promising opportunity for bold, innovative and disciplined executives to transform their franchises. But I believe regulatory hurdles are making it tougher to do deals. Indeed, the recently approved merger of CIT Group and OneWest Bank creates a SIFI [Systemically Important Financial Institution] which will have to submit to increased regulation and scrutiny. However, when the deal was first announced, CIT’s CEO, John Thain, suggested that his purchase of OneWest could spur other big banks to become buyers. A year later and such activity has yet to be seen.

I see the absence of bigger deals reflecting a reality where any transaction comes with increased compliance and regulatory hurdles. For CIT, going over the $50 billion hurdle meant annual stress tests will now be dictated by the government, as opposed to run by the bank. The institution will have to maintain higher capital levels. Thain seems to think that those added costs and burdens are worth it. By the lack of action, other banks haven’t yet agreed.

Without a doubt, regulatory focus has impacted strategic options within our industry. For instance, we learn about CRA [Community Reinvestment Act] impacting deals and also find fair lending concerns and/or the Bank Secrecy Act delaying or ending potential mergers. Consequently, deals are more difficult to complete. As much as a bank like CIT can add cost savings with scalability to become more efficient, you can understand why banks in certain parts of the country need to debate whether it is better to sell today or to grow the bank’s earnings and sell in three to five years.

The evidence is clear that big banks are not doing deals. Maybe a GOP victory in the next election will thaw certain icebergs, creating a regulatory environment more friendly to banks. While regulators have to comply with existing laws, the leadership of regulatory institutions is appointed by the president and the tone at the top is critical in interpreting those laws. Until we see real action replace cheap talk, I’m looking at CIT as an outlier and simply hoping that political rhetoric doesn’t give false hope to those looking to grow through M&A.

Safeguarding Your Institution’s Anti-Money Laundering Compliance Program


12-5-14-Covington.jpgThe Financial Crimes Enforcement Network (FinCEN) earlier this year issued an advisory, FinCEN Bulletin 2014-A007, “Advisory to U.S. Financial Institutions on Promoting a Culture of Compliance,” stressing the need for financial institutions to have a strong culture of anti-money laundering (AML) compliance. A financial institution without such a culture, FinCEN asserts, is likely to have shortcomings in its Bank Secrecy Act/AML compliance program.

FinCEN’s advisory is just one of the latest governmental developments that places tremendous pressure on a bank’s board of directors to focus on AML compliance. The advisory attributes a strong compliance culture to, among other factors, the board of directors’ active support and understanding of the bank’s AML compliance efforts.

The need for a bank’s board of directors to be involved with AML compliance has been emphasized repeatedly in the past year. Recent enforcement actions against all types of banks, from multinational banking organizations to small community banks, have required boards of directors to play a prominent role in understanding and ultimately executing the enforcement action. Many actions have imposed remedial requirements on the board of directors itself to strengthen board oversight of the bank’s AML compliance program.

However, significant fines, compliance costs, and reputational damage from an enforcement action are not the only risks from a deficient AML compliance program. The federal banking agencies have delayed approval of several mergers, acquisitions, and other corporate transactions due to deficiencies in one of the parties’ AML compliance program. If a federal banking agency withholds its approval for a corporate transaction due to AML compliance, the closing for the transaction can be substantially delayed, thereby having the potential to make public in a highly visible fashion the compliance deficiencies as well as any remedial measures being taken by the bank.

All of these reasons demonstrate the importance of AML compliance to a bank and the imperative that the board of directors plays a significant role in overseeing the AML compliance program.

An effective AML compliance program requires significant resources and consists of several key components. The federal banking agencies’ enforcement actions and guidance have emphasized the following components:

  • Tone at the top—FinCEN Bulletin 2014-A007 stresses the need for a culture of compliance, and this culture starts with a clear expression from the bank’s board of directors that the bank does not engage in money laundering and terrorist financing and will not tolerate deficiencies in its compliance program.
  • Risk assessment—The cornerstone of an AML compliance program is a detailed risk assessment that identifies and measures the various areas of AML risk at the bank. The risk assessment provides insight into the areas of potential exposure to the bank, prioritizes ways to reduce risk within the compliance program, and enables the board of directors to track over time areas of risk and senior management’s implementation of internal controls to reduce risk. An AML risk assessment should be sufficiently detailed, updated periodically, and accessible to functions and business units in the bank with responsibility for AML compliance.
  • Monitoring and reporting—Day-to-day AML compliance requires extensive monitoring of transactions for suspicious activity and compliance with reporting obligations. Aside from compliance with these legal requirements, however, daily monitoring and internal reporting help ensure that bank employees not only react appropriately to overtly suspicious activity but also proactively identify circumstances that, although not facially suspicious, warrant further review.
  • Independent review—An AML compliance program is required to contain a mechanism for an independent review of the program. Independent review is an essential check on the program and those employees who are responsible for its administration.
  • Training—AML training for employees has evolved substantially from its earliest forms as a single presentation made available to all employees on a company intranet page. Training can be customized to the business line or function, include frequent team updates to pass along information quickly and directly, and culminate with a mandatory test that employees must successfully pass.

Boards of directors should have confidence that senior management has taken the necessary steps to implement an effective AML compliance program that includes these components. The potential consequences for AML compliance deficiencies are simply too severe and far-reaching for a board of directors to be passive and not actively engaged with the program.

Bank Secrecy Act: Do Regulators Care?


Accounting fraud, terrorist attacks and economic meltdowns are the catalysts for many of today’s financial regulations. With so much focus recently on the Dodd-Frank Act, many financial institutions may be overlooking the compliance requirements for the Bank Secrecy Act (BSA), or anti-money laundering law. In this video, John ReVeal, attorney for Bryan Cave LLP, shares his insights into how BSA violations are perceived by the regulators.