The Next Things To Know About Data


data-3-5-19.pngThere’s one thing in today’s banking industry that is critical to remaining competitive, being innovative, and maintaining compliance and risk levels: data.

This is no longer a surprise for most banks. It’s an issue that comes up often among bank boards and management, but there are still a number of challenges that banks must overcome to be successful in all of those areas.

It has a connection to many of the major decisions boards make, from what third-party partners to join forces with to how it integrates the next landmark technology.


	strategy-3-5-19-tb.pngFive Steps to a Data-Driven Competitive Strategy
Maintaining a competitive advantage for banks today lies in one of its most precious assets: data. Banks have the gold standard of consumer data, and leveraging that information can be the trump card in achieving growth goals.

Getting there, though, requires good governance of data and technology, and then using those elements to craft strategic objectives.

compliance-3-5-19-tb.pngFintechs Can Fend Off Compliance Issues With Data
Fintechs are known to be nimbler than banks for a few reasons, including a limited regulatory framework compared to their bank partners and a smaller set of products or services. But with that relative freedom comes added risk if they don’t comply with broader regulatory requirements. One compliance problem can put a fintech out of business.

But those companies can use data to reduce compliance risk. Here’s how.

risk-3-5-19-tb.pngRisk Management at the Forefront in Fintech Partnerships
Bank regulators have generally kept their distance from interfering in bank-fintech partnerships. Agencies have deferred to the bank’s third-party risk management process, but some regulators have indicated the intent to keep a closer eye on third-party fintech firms.

Here is an overview of what banks should keep in mind when considering and managing the risk associated with these third-party partnerships.

innovation-3-5-19-tb.pngFour Ways To Innovate And Manage Risk, Compliance
There is a careful balance that banks must strike in today’s industry. To remain competitive, they have to innovate, but they also have to remain compliant with regulations, many of which have stood for years, and manage risks that can ebb and flow with economic and technological pressure.

Finding a similar balance between thinking strategically for the future while also remembering what has worked and not worked can also be challenging for financial institutions. Building a checklist around these four ideas can help achieve that balance.

partner-3-5-19-tb.pngHow to Pick The Right Data Partner
Banks are grappling with trying to gain the greatest efficiency through a variety of innovative and technological tools, but often are hampered by the quality of the data they maintain. To make correct and sound decisions, accurate and reliable data is essential.

Partnering with third-party data service providers can help with that effort, but even that requires due diligence. To help with that due diligence, banks should have a checklist of capabilities for those partners.

Six Things To Know About CECL Right Now


CECL-11-13-18.pngMany banks began the transition to CECL in earnest when the final version was issued in 2016. While banks are in various stages, some are already working through more nuanced aspects of the transition.

Many lessons have been learned from actual CECL implementations, and here are some tips to assist bank directors as they guide management through the transition.

1. The quantitative impact of CECL adoption may be less straightforward than initially expected. Even before the final CECL standard was issued, industry observers tried to predict just how much the allowance would increase upon adoption. In truth, it will be almost impossible to estimate the impact of the transition for an individual institution. The actual impact will depend upon many bank-specific factors, the estimation method, the length of the reasonable supportable forecast, the size of today’s qualitative adjustment, and management’s outlook, to name a few. Additionally, some banks with short-term portfolios have been surprised to discover the CECL estimate may be lower than the current allowance due to a shift from an estimate based on a loss emergence period to one that considers the next contractual maturity date.

2. CECL may result in a requirement to manage model risk for unsuspecting institutions. Similar to reserving practices today, banks are employing a variety of approaches. General trends include the largest institutions employing statistical software to build custom in-house models, while the smallest institutions favor a less complex approach that relies on adjusting historical averages. Many institutions who are not using models are relying on “correlations” to support their adjustments. However, this practice needs to be managed carefully, as per regulatory definition, any method that applies a statistical approach, economic, financial, or mathematical theory to derive a quantitative estimate is considered a “model.” Therefore, using a correlation – regardless of whether it is identified in a spreadsheet, vendor solution, or anywhere else – to quantify the impact of a factor is by definition a model, and subject to model risk management. Institutions taking this approach to CECL should carefully consider the scope of model risk management, and avoid accidentally creating or misusing models.

3. Qualitative adjustments will still be necessary. Regardless of the method used to estimate the impact of forecasted conditions, there will still be a need to apply expert judgment for factors not considered in the quantitative (modeled) estimate. Even the most sophisticated models used by the largest banks will not consider every factor. Further, many banks prefer the flexibility to exercise judgment in their reserving process. While it’s not yet clear which factors the industry will use or how to quantify the lifetime impact, as it relates to regulatory and auditor oversight, the level of scrutiny around qualitative adjustments will not decrease from existing practice. Again, accidentally creating models is particularly important given the scrutiny on management judgment and the overall impetus to quantify it.

4. Think beyond compliance. One of the overarching goals of CECL is to better align credit loss measurement with underwriting and risk management practices. The transition to CECL presents banks with an opportunity to have unprecedented insight into the credit portfolio. For example, a comparison between the CECL estimate and the interest margin can provide insight into underwriting practices. But this can only happen if banks take a holistic approach to the transition and make the necessary investment in systems and reporting.

5. Reporting and analytics will be more important than ever. Bank directors will be responsible for answering shareholder questions related to the CECL reserve, which will be sensitive to changes in forecasted conditions. As a key constituent of the disclosures and internal management reports, bank directors have a responsibility to ensure a proper reporting framework is in place – one that integrates the data inputs and quantifies the change in expected credit losses at the instrument level. Attribution reports, for example, will be especially helpful in explaining why the allowance changed because they isolate and quantify the impact of individual variables affecting the reserve.

6. Be prepared for an iterative process, even after adoption. Translating the conceptual to operational can reveal unintended consequences and further questions. The industry has continued to work through implementation concerns since the final version was issued in 2016, including several meetings of the CECL Transition Resource Group. Industry best practices will evolve well after initial adoption.

Relief for Community Banks in the Competition for Deposits


deposits-10-22-18.pngThe recent bank reform bill made a lot of news, but what may surprise you is the specific provision of the Economic Growth, Regulatory Relief, and Consumer Protection Act that community bankers believe will have the biggest impact on their daily business.

Before the bill became law, a lot of attention was placed on the provision raising the systemically important financial institutions, or SIFI, threshold from $50 billion to $250 billion in assets, above which banks must contend with a heavier compliance burden.

Yet, the provision involving SIFIs directly impacts only a small number of commercial banks based in the United States—the dozen-plus with between $50 billion and $250 billion in assets.

Perhaps that’s why when Promontory Interfinancial Network queried bankers for its second-quarter Executive Business Outlook Survey, executives from the 390 banks that responded pointed elsewhere when asked to identify the law’s most impactful provision.

Thirty-seven percent of respondents said the law’s provision that allows most reciprocal deposits to be treated as nonbrokered deposits ranked highest on a scale of one to five, placing it first among the seven other provisions tested.

It was up against stiff competition. The other provisions included those that eased the qualified mortgage rule, extended the regulatory exam cycle and simplified capital rules for community banks, among others.

“We think the change to reciprocal deposits is great,” says Christopher Cole, executive vice president and senior regulatory counsel for the Independent Community Bankers of America. “It clarifies the status of reciprocal deposits and alleviates the concerns many community banks had about using them.”

Similarly, the American Bankers Association noted that, “the definition of brokered deposits needs to be modernized and we appreciate that Congress took a first step by recognizing reciprocal deposits are a stable source of funding for many community banks.”

The change in the law makes sense, says Neil Stanley, president of community banking at TS Banking Group, which owns three banks, including Treynor State Bank, a $400 million bank based in Treynor, Iowa: “This is one of those areas that reflects what bankers always thought was true—when a large, local depositor does business with us, any deposits above the $250,000 FDIC insurance threshold shouldn’t be considered brokered or highly volatile just because we place them with other institutions on a reciprocal basis.”

Underscoring the significance of the change, 58 percent of respondents to Promontory Interfinancial Network’s survey said they plan to start using, or expanding their use of, reciprocal deposits immediately or very soon because of the new law. An additional 29 percent said they would consider doing so in the future.

To put this in perspective, according to the same bank leaders, the next most impactful provision included in the new law relates to the easing of rules surrounding commercial real estate loans, followed by the provision that shortened call reports and then by the provision that provided qualified mortgage relief.

The change in reciprocal deposits may seem like a peripheral issue, but it addresses a fundamental inequity in banking. It does so by helping to level the playing field between the handful of large, money center banks headquartered in places like New York City and the thousands of smaller banks spread across the country that serve as economic lifelines in their communities.

Institutional investors have often favored big banks because of the belief they are “too big to fail.” And since they have more resources to invest in mobile and online banking technology, big banks have become magnets for deposits from the new generation of digitally savvy consumers. These banks no longer need to rely as heavily on building branches in rural communities to compete with community banks for funding; they can now reach small-town customers through their smartphones.

As such, many of the nation’s biggest banks are reporting organic increases in deposits. And the competition on the funding side of the balance sheet will only intensify as interest rates climb. The Federal Reserve’s Open Market Committee has raised the fed funds rate multiple times this year and is expected to continue doing so.

By making it easier for community banks to use reciprocal deposits, in turn, the new law strengthens their ability to grow relationships and deposits from a local customer base without losing either one to bigger banks with deeper pockets.

“This is a step in the right direction,” says Bert Ely, a principal of Ely & Company, where he monitors conditions in the banking industry. “It makes it easier for community banks to accommodate large depositors.”

Given all this interest, it seems likely that the use of reciprocal deposits will increase in the coming months and years. Banks not currently familiar with them would thereby be wise to familiarize themselves with how reciprocal deposits work and their benefits.

If you are interested in reading the full bank survey report, visit here. To learn more about reciprocal deposits and the impact of the new law, go to promnetwork.com.

Blockchain: What You Need To Know



Cryptocurrencies and blockchain could directly affect banks as the technology evolves, and regulators start to pay more attention to the issue. But what does the board need to know about this seemingly complex technology? In this video, Wolters Kluwer’s Stevie Conlon breaks down the differences between blockchain and cryptocurrency, as well as the broader regulatory implications.

  • Blockchain vs. Cryptocurrency
  • Obstacles Facing the Cryptocurrency Space
  • Compliance and Regulatory Concerns

How To Make Construction Lending Less Risky


lending-8-14-18.pngWhen compared to the world economy as a whole, the construction industry lacks luster, at least in terms of its embrace (or lack thereof) of digital innovation. According to a 2017 report by the McKinsey Global Institute (MGI), the construction sector has grown by just one percent over the past two decades, while global economic growth has increased at nearly three times that rate. Construction was also the second-least digitized economic sector on MGI’s Digital Index, indicating a serious need for digitization, which could help boost the industry’s growth rate.

Another MGI report found a significant performance gap between industry members that leveraged digitization compared to those who don’t, “with the U.S. economy reaching only 18 percent of its digital potential.” The current lack of technology in the construction industry presents a clear opportunity for industry players establish industry leadership.

A Perfect Storm: Industry Growth Meets Digitization in a Burgeoning Economy
Despite political agitation and a series of natural disasters, 2017 proved to be a strong year for the housing market. Housing showed steady growth in spite of these external factors and a 10.5-percent decline between November 2015 and November 2016. Experts at Zillow believe the housing shortage will continue to drive housing market trends throughout 2018, swelling consumer demand for remodels and new construction.

Fueled by stable interest rates, a strong economy, and inventory shortages, the construction industry stands to enter a period of significant growth in 2018. As predicted by Dodge Data & Analytics, the industry could see a three percent increase with new construction starts in 2018 reaching an estimated $765 billion.

If the industry fails to digitize, it will likely struggle to keep pace with market demands. Currently, large construction projects take 20 percent longer than expected to reach completion and are up to 80 percent over budget. Not only do significant delays and expense oversights like these inhibit those working directly in the industry, such as contractors, sub-contractors, builders, and developers, but also those financing the projects. Missing project completion targets and budget goals makes improperly monitored construction lending a risky business. MGI lists improved “digital collaboration and mobility” as essential to the construction industry’s ability to meet its potential future growth.

Relieve Strain on Lender Resources with Digitization
Oldcastle Business Intelligence estimated in their 2018 Construction Forecast Report that construction, as a whole, would grow by 6 percent in 2018. This year is projected to see significant growth in single-family housing starts, estimated to increase 9 percent, with a predominant focus on Southern and Western regions. As housing and construction demands continue to climb, financial institutions stand to corner a substantial chunk of the growing market and increase revenue.

Historically, lenders have shied away from construction lending, viewing construction loan portfolios as administratively taxing and risky from both regulatory and credit decision perspectives. By bringing the construction loan administration process online through collaborative, cloud-based software, financial institutions can become industry leaders while relieving the burden on their lenders, mitigating risk, and improving the experience for everyone involved.

Reduce Risk with Construction Lending Software
The digitization of construction lending translates to less risk all around. Construction lending software streamlines the facilitation of compliance and regulatory timelines, reducing potential fines and penalties for non-compliance or loan file exceptions. In addition to the risks imposed on the industry by staunch government regulations, lenders also understand the high credit risk involved with traditional construction loans (and their many moving parts) due to their multifaceted, unpredictable nature.

Overseeing construction portfolios requires constant vigilance in tracking and monitoring cost estimates, advances, material purchases, labor costs, construction plans, and timelines, all while ensuring proper paperwork is filed and maintained for every transaction and correspondence.

Bringing the construction loan management process online gives lenders the ability to monitor their entire construction portfolio from one location. Real-time monitoring and alerts automatically highlight areas of concern, excessive advances, stale loans, maturities and overfunded projects. Digital oversight also allows lenders to foresee and correct potential problems with budget and timelines.

Increase Efficiencies Through Digitization
Financial institutions that implement a digital solution for construction loan administration drastically improve efficiencies, eliminating former portfolio limitations. By increasing efficiency, lenders can invest more time in bringing in additional business, approving more loans, and better serving existing clients.

Improve User Experience with Digital Lending
In addition to risk mitigation and efficiency gains, construction lending software also drastically improves the overall user experience in the construction loan administration process by providing a singular platform for communication throughout the life of each loan. Bringing the process online allows lenders, borrowers, builders, inspectors, and appraisers to collaborate and communicate in one place, preventing missed phone calls and the inevitable tangle of email correspondence.

The Three C’s of Compliance



Compliance doesn’t have to be the department of ‘no:’ It can be a benefit, rather than a burden. Barbara Boccia of Wolters Kluwer explains the three C’s that drive a culture of compliance and describes how to integrate these factors within the organization.

  • Turning Compliance Into a Competitive Advantage
  • Key Factors That Drive Compliance Culture
  • Elevating Compliance as a Strategic Asset

Risk & Innovation: Bridging The Gap



In today’s age of innovation, risk management can no longer be the office of ‘no.’ When risk managers are included in strategic discussions, they can help drive innovation and provide additional value to their organizations. In this video, Crowe’s John Epperson explains how successful banks bridge the gap between risk and innovation to truly bring value to their institutions.

  • Why Banks Should Transform Risk Management
  • Creating a Competitive Advantage Through Risk and Compliance

Now Is The Time to Use Data The Right Way


data-6-29-18.pngMost bankers are aware of the changes that are forthcoming in accounting standards and financial reporting for institutions of all sizes, but few are fully prepared for the complete implementation of all of the details in the new current expected credit loss (CECL) models that will take effect over the next few years.

Banks that act now to effectively and strategically collect, manage and utilize data for the benefit of the institution will be better positioned to handle the new accounting requirements under CECL and evolving regulations with state and federal agencies.

Here are three articles that cover key areas where your board should focus its attention before the rules take effect.


credit-data-6-29-18.pngCredit Data Management
Under Dodd-Frank, the law passed in the wake of the financial crisis, banks of all sizes and those especially in the midsize range of $10 billion to $50 billion in assets were required to do additional reporting and stress testing. Those laws have recently been changed, but many institutions in that asset category are opting to continue some form of stress testing as a measure of sound governance. Managing credit data is a key component of those processes.

management-6-29-18.pngCentralizing Your Data
Bank operations are known to be siloed in many cases as a matter of habit, but your data management can be done in a much more centralized manner. Doing so can benefit your institution, and ease its compliance with regulations.

CECL-6-29-18.pngGet Ready for CECL Now
The upcoming implementation of new CECL standards has many banks in a flurry to determine how those calculations will be developed and reported. Few are fully ready, but it is understood that current and historical loan level data attributes will be integral to those calculations.

Advice for New Bank Directors


governance-8-30-17.pngIf you have recently been appointed to a bank board, chances are you’re like most new directors in that you came from outside the industry and have little knowledge of banking other than what you might have learned as a customer. If, for example, you’re the owner of a local business that relies heavily on its banking relationships to keep the enterprise going (as most small businesses do), you will certainly have an opinion about what constitutes good customer service. And also you bring your own judgment and life experience outside of banking to the task, which will no doubt be very valuable to the board. But to be an effective bank director, you’re going to have broaden your knowledge base considerably when it comes to banking. Good judgment isn’t enough. There are certain things that you will need to know.

Learning is a life-long exercise, and for as long as you serve on a bank board there will always be new things to learn. But here are four areas that I think new directors should give extra attention to:

Learn About Regulation.
Banking is a complicated and highly regulated industry, and banks can pay a steep price for their compliance sins. Take the time to understand the industry’s regulatory structure and the expectations of your bank’s primary regulators, which will vary depending on the size of your institution and whether it has a state or national charter. Also, zero in on the regulations that can have the greatest impact on your bank (for example, the Bank Secrecy Act and the various consumer protection rules). The regulators will hold your board accountable for any serious compliance violations, so it’s not a responsibility to be taken lightly.

Learn How Your Bank Works.
Banking is very different from most other businesses like, say, manufacturing and retailing, or professional services like accounting and lawyering. Yours is a governance rather than an operating role, but you should still learn how your bank works inside and out so you can engage fruitfully with management. Learn how your bank makes most of its money and where its greatest risks lie. Service on the board’s audit committee would provide a very powerful introduction to the workings of your bank, because there’s very little that the audit committee doesn’t get involved in.

Learn About Technology and Try to Embrace It.
Technology tends to be a black hole for most boards. Most people in their 60s and 70s, which fits the profile of many directors who serve on bank boards, don’t understand or use technology as comfortably as those who are 20 or 30 years younger. The problem is that banking is undergoing a technological revolution that goes well beyond mobile (which gets most of the attention these days) and touches almost every area of the bank. Directors need to understand how these trends are likely to impact their institution. Some banks try to recruit at least one tech-savvy director to their board, but these people are hard to find—and even if you find one, you can’t delegate the responsibility to understand technology to that person. Regular board-level briefings from your bank’s chief technology officer, attendance at industry conferences and a commitment to read up on the topic can all help educate you. Also, experiment with some of the consumer technology that has come into financial services in recent years. If you have an iPhone, activate its wallet feature. Open a Venmo account and use it. And if you don’t use your own bank’s mobile banking app, shame on you!

Learn About Cybersecurity.
As banks become more digital, their cyber risk profile will increase ipso facto. Trying to lessen the risk by resisting the push toward digital banking isn’t a rational strategy because your institution will be left behind. The U.S. economy and our national culture are all being profoundly impacted by the digital phenomenon, and it’s a game that all banks simply have to play. Your role as a director is to make sure your bank has a good cybersecurity program and team in place, that the program conforms to the latest industry standards and regulatory expectations, and that the board is being briefed regularly.

These are not the only critical areas that new directors need to understand, of course, but they would be on my short list of things to go to school on if I had just joined a bank board. Congratulations and good luck!

Cybersecurity & Regtech: Defending The Bank



How can financial institutions proactively combat the risks facing the industry today? The 2018 Risk Survey—presented by Bank Director and Moss Adams LLP—compiled the insights of directors, chief executive officers and senior executives of U.S. banks with more than $250 million in assets. According to the survey, the worries keeping top executives awake at night align with the key priorities that banks commonly hear from banking regulators: cybersecurity, compliance and strategic risk.

Cybersecurity
Cybersecurity was the biggest concern by far, reported by 84 percent of respondents.

The survey addressed the confidence that executive and directors have in their institutions’ cybersecurity programs, with an emphasis on staffing and overall effectiveness. Access to the proper talent—in the form of a chief information security officer (CISO) or a strategic partner with the necessary skill set—and associated costs are key to a successful program, and 71 percent of respondents revealed their bank employs a full-time CISO.

While technical skills are valuable in today’s business environment, financial institutions must overcome their dependence on skilled technicians who don’t necessarily have the ability to strategically look at the changing technological landscape. The CISO should build an appropriate plan by taking a full view of the bank’s technology and strategy. Without this perspective, a bank could provide hackers with an opening to breach the institution, regardless of size or location.

Institutions building the foundation of a robust cybersecurity program should also focus on three key areas:

  • Assessment tools: Is the institution leveraging the proper technologies to help maximize the detection and containment of potential issues?
  • Risk assessments: Has management identified current risks to the organization and implemented proper mitigation strategies?
  • Data classification: Has management identified all critical data and its forms, and addressed the protection of this data in the risk-assessment process?

Compliance
Compliance was the second biggest area of concern, identified by 49 percent of respondents. It’s an area that continues to evolve as new regulators have been appointed to head the agencies that regulate the industry, and technological tools—dubbed regtech—have entered the marketplace.

More than half of survey respondents indicated that the introduction of regtech has increased their banks’ compliance budgets, demonstrating that the cost of solutions and staff to evaluate, deploy and support these efforts in an effective manner is a growing challenge.

Because the volume of available data and the ability to analyze that data continues to grow, respondents may have felt this technology should have effectively decreased the cost of operating a robust compliance program.

Executives looking to decrease costs may want to consider the staffing required to operate a compliance program and whether deploying technology would allow for fewer personnel. When technology is properly used and standards are developed to help guarantee efficient use of it, the dilemma of acquiring technology versus adding staff can often be more easily solved.

Strategic Risk
Strategic risk was the third largest area for concern, identified by 38 percent of respondents. Many directors and executives are wrestling with what the future holds for their institutions. The debate often boils down to one question: Should they continue to build branches or invest more in technology—either on their own or by partnering with fintech companies?

Fintech companies are a growing player in lending and payments segments, areas that were historically handled exclusively by traditional institutions. That, coupled with clients who no longer value personal relationships and instead prioritize being able to immediately access services via their devices, increases the pressure to deliver services via technology channels.

Financial institutions have entered what many would call a perfect storm. Every institution will need to make hard decisions about how to address these issues in a way that facilitates growth.

Assurance, tax, and consulting offered through Moss Adams LLP. Wealth management offered through Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC.