Rodge Cohen: Are We Preparing to Fight the Last War?


risk-3-1-19.pngHis name might not command the same recognition on the world stage as the mononymous Irish singer and song-writer known simply as Bono, but in banking and financial services just about everyone knows who “Rodge” is.

H. Rodgin Cohen–referred to simply as Rodge—is the unrivaled dean of U.S. bank attorneys. At 75, Cohen, who is the senior chairman at the New York City law firm Sullivan & Cromwell, is still actively involved in the industry, having recently advised SunTrust Banks on its pending merger with BB&T Corp.

Cohen has long been considered a valued advisor within the industry.

In the financial crisis a decade ago, he represented corporate clients like Lehman Brothers and worked closely with the federal government’s principal players, including Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke. His character even made an appearance in the movie “Too Big To Fail,” based on a popular book about the crisis by Andrew Ross Sorkin.

Eleven years later, Cohen says the risk to the banking industry is no longer excessive leverage or insufficient liquidity—major contributing factors to the last crisis.

The Dodd-Frank Act of 2010, passed nearly a decade ago, raised bank capitalization levels substantially compared to pre-crisis levels. In fact, bank capitalization levels have been rising for 40 years, going back to the thrift crisis in the late 1980s. Dodd-Frank also requires large banks to hold a higher percentage of their assets in cash to insure they have enough liquidity to weather another financial storm.

The lesson from the last crisis, says Cohen, revolves around the importance of having a fortress balance sheet. “I think that was the lesson which has been thoroughly learned not merely by the regulators, but by the banks themselves, so that banks today have exponentially more capital, and the differential is even greater in terms of having more liquidity,” says Cohen.

But does anyone know if these changes will be enough to help banks survive the next crisis?

“I don’t think it is possible to calculate this precisely, but if you look at the banks that did get into trouble, none of them had anywhere near the level of capital and liquidity that is required now,” says Cohen. “Although you can’t say with certainty that this is enough, because it’s almost unprovable, there’s enough evidence that suggests that we are at levels where no more is required.”

It is often said that generals have a tendency to fight the last war even though advances in weaponry—driven by technology—can render that war’s tactics and strategies obsolete. Think of the English cavalry on horseback in World War I charging into German machine guns.

It can be argued that regulators, policymakers and even customers in the United States still bear the emotional scars of the last financial crisis, so we all find comfort in the fact that banks are less leveraged today than they have been in recent history, particularly in the lead up to the last crisis.

But what if a strong balance sheet isn’t enough to fight the next war?

“I think the biggest risk in the [financial] system today is a successful cyberattack,” says Cohen. While a lot of attention is paid to the dangers of a broad attack on critical infrastructure that poses a systemic risk, Cohen worries about something different.

“That is a very serious risk, but I think the more likely [danger] is that a single bank—or a group of banks—are hit with a massive denial of service for a period of time, or a massive scrambling of records,” he says. This contagion could destabilize the financial system if depositors begin to worry about the safety of their money.

Cohen believes that financial contagion, where risk spreads from one bank to another like an infectious disease, played a bigger role in the financial crisis than most people appreciate. And he worries that the same scenario could play out in a crippling cyberattack on a major bank.

“Until we really understand what role contagion played in 2008, I don’t think we’re going to appreciate fully the risk of contagion with cyber,” he says. “But to me, that is clearly the principal risk.”

And herein lays the irony of the industry’s higher capital and liquidity requirements. They were designed to protect against the risk of credit bubbles, such as the one that precipitated the last crisis, but they will do little to protect against the bigger risk faced by banks today: a crippling cyberattack.

“That’s why I regard [cyber] as the greatest threat,” says Cohen, “because a fortress balance sheet won’t necessarily help.”

The Biggest Changes in Banking Since 1993


acquire-1-25-19.pngWhen Bank Director hosted its first Acquire or Be Acquired Conference 25 years ago, Whitney Houston’s “I Will Always Love You” held the top spot on Billboard’s Top 40 chart.

Boston Celtics legend, Larry Bird, was about to retire.

Readers flocked to bookstores for the latest New York Times best seller: “The Bridges of Madison County.”

Bill Clinton had just been sworn in as president of the United States.

And the internet wasn’t yet on the public radar, nor was Sarbanes Oxley, the financial crisis, the Dodd-Frank Act, Occupy Wall Street or the #MeToo movement.

It was 1993, and buzzwords like “digital transformation” were more intriguing to science-fiction fans than to officers and directors at financial institutions.

My, how times have changed.

AL-CurtainRaiser-Image[1].png

When we introduced Acquire or Be Acquired to bank CEOs and leadership teams a quarter century ago, there were nearly 11,000 banks in the country. Federal laws prohibited interstate banking at the time, leaving it up to the states to decide if a bank holding company in one state would be allowed to acquire a bank in another state. And commercial and investment banks were still largely kept separate.

Today, there are fewer than half as many commercial banks—of the 10 banks with the largest markets caps in 1993, only five still exist as independent entities.

It’s not only the number of banks that has changed, either; the competitive dynamics of our industry have changed, too.

Three banks are so big that they’re prohibited from buying other banks. These behemoths—JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp.—each control more than 10 percent of total domestic deposits.

Some people see this as an evolutionary process, where the biggest and strongest players consume the weakest, painting a pessimistic, Darwinian picture of the industry.

Yet, this past year was the most profitable for banks in history.

Net income in the industry reached a record level in 2018, thanks to rising interest rates and the corporate tax cut.

Profitability benchmarks in place since the 1950s had to be raised. Return on assets jumped from 1 percent to 1.2 percent, return on equity climbed from 10 percent to 12 percent.

Nonetheless, ominous threats remain on the horizon, some drawing ever nearer.

  • Interest rates are rising, which could spark a recession and influence the allocation of deposits between big and little banks.
  • Digital banking is here. Three quarters of Bank of America’s deposits are completed digitally, with roughly the same percentage of mortgage applications at U.S. Bancorp completed on mobile devices.
  • Innovation will only accelerate, as banks continue investing in technology initiatives.
  • Credit quality is pristine now, but the cycle will turn. We are, after all, 40 quarters into what is now the second-longest economic expansion in U.S. history.
  • Consolidation will continue, though no one knows at what rate.

But it shouldn’t be lost that certain things haven’t changed. Chief among these is the fact that bankers and the institutions they run remain at the center of our communities, fueling this great country’s growth.

That’s why it’s been such an honor for us to host this prestigious event each year for the past quarter century.

For those joining us at the JW Marriott Desert Ridge outside Phoenix, Arizona, you’re in for a three-day treat. Can’t make it? Don’t despair: We intend to share updates from the conference via BankDirector.com and over social media platforms, including Twitter and LinkedIn, where we’ll be using the hashtag #AOBA19.

How AML Compliance Could Soon Change


AML-9-21-18.pngDespite major changes in compliance obligations starting with the Dodd-Frank Act through the more recent Economic Growth, Regulatory Relief, and Consumer Protection Act, requirements related to anti-money laundering (AML) compliance have remained largely unchanged.

The last major revision of AML compliance requirements was in 2001 with the U.S.A. PATRIOT Act amendments to the Bank Secrecy Act. This era may be coming to an end with the reintroduction earlier this summer of H.R. 6068, Counter Terrorism and Illicit Finance Act (CTIFA), and the convergence of market developments.

Although the reintroduced CTIFA bill removes a prior provision that would have required beneficial ownership information for new corporations to be collected and provided to FinCEN, the revised CTIFA would make a number of other significant changes to AML compliance requirements:

  • Increase the filing thresholds for currency transaction reports from $10,000 to $30,000 and for suspicious activity reports (SARs) from $5,000 to $10,000;
  • Require the Secretary of the Treasury to undertake a formal review of the information reporting requirements in the BSA to ensure the information is “of a high degree of usefulness” to law enforcement, and to propose changes to reduce regulatory burden;
  • Reduce impediments to the sharing of SAR information within a financial group, including with foreign branches, subsidiaries, and affiliates;
  • Create a process for FinCEN to issue no-action letters concerning the application of the BSA or any other AML law to specific conduct, including a statement whether FinCEN has any intention of taking an enforcement action with respect to such conduct;
  • Encourage the use of technological innovations such as artificial intelligence in AML compliance;
  • Establish an 18-month safe harbor from enforcement of FinCEN’s beneficial ownership and customer due diligence rule, which became effective in May 2018; and
  • Commission studies on the effectiveness of current beneficial ownership reporting regimes and cost-benefit analyses of AML requirements.

Although the CTIFA’s prospects for passage are uncertain, several of its provisions track market developments that are already bringing about change. First, innovative technologies such as artificial intelligence and blockchain increasingly are being leveraged for AML compliance solutions.

Artificial intelligence has the potential to transform terabytes of customer information into actionable AML insights including, for example, customizable pre-drafted suspicious activity report templates or customer risk profiles. These risk profiles update in real time in support of the new customer due diligence “pillar” of AML compliance. Blockchain and other distributed ledger technologies may be deployed to create standardized digital identities for customers to expedite and safeguard KYC and authentication processes.

Second, banks already are taking a hard look at their CTR and SAR processes to determine the ratio of meaningful information to noise that has been included in these reports. This augmented reporting will result in a direct benefit to the network of federal government agencies tasked with analyzing reports to find information with a high degree of usefulness in law enforcement investigations.

Third, banks are increasingly providing services to new types of high-risk businesses, such as marijuana-related businesses (“MRBs”) and cryptocurrency companies. FinCEN has for each of these industries been a pioneer in issuing guidance relatively early in the industry’s lifecycle to explain how AML compliance obligations apply, but this guidance requires updating. As just one example, FinCEN’s three-tiered system for filing SARs applies when a bank provides banking services directly to an MRB, but there are less clear SAR filing guidelines when a bank provides services to a customer that provides services to MRBs or owns shares of an MRB.

Banks continue to use FinCEN’s administrative ruling request process or the supervisory process to obtain guidance for high-risk customers, albeit in an ad hoc, non-public way. This request process is less effective than the no-action letter process contemplated in the CTIFA.

The CTIFA, if enacted, would significantly change AML compliances. At the same time, innovation and new business opportunities, among other market developments, are already contributing to AML compliance enhancements. Regardless of whether the legislation passes, the industry appears to be entering an era of change.

Dodd-Frank Reform Creates New Strategic Considerations For Community Banks


regulation-9-14-18.pngIn May, President Donald Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Growth Act”), which provided long-awaited—and in some cases modest—regulatory relief to financial institutions of all sizes. Due to the adjustment of certain assets thresholds that subject banks to various regulatory burdens, the biggest winners from the regulatory reform are community banks with assets below $10 billion and regional banks with total assets above the $10 billion threshold and aspirations for future significant growth. As a result, it is incumbent upon these institutions to include in their strategic planning a new set of issues, examples of which are provided below.

Congress Eases Regulatory Environment for Community Banks
For community banks under $10 billion in total consolidated assets, the Growth Act repealed or modified several important provisions of the Dodd-Frank Act. In particular, the Growth Act:

  • Increases the total asset threshold from $2 billion to $10 billion at which banks may deem certain loans originated and held in portfolio as “qualified mortgages” for purposes of the CFPB’s ability-to-repay rule;
  • Requires the federal banking agencies to develop a Community Bank Leverage Ratio of not less than 8 percent and not more than 10 percent, under which any qualifying community banks under $10 billion in total assets that exceeds such ratio would be considered to have met the existing risk-based capital rules and be deemed “well capitalized;” and
  • Amends the Bank Holding Company Act to exempt from the Volcker Rule banks with total assets of $10 billion or less and which have total trading assets and trading liabilities of 5 percent or less of their total consolidated assets.
  • It is expected that these changes will have a significant effect on the operations of community banks. As an example, qualifying banks under the Community Bank Leverage Ratio will be relieved from the more stringent international capital standards and, as a result, may be better able to deploy capital.

Crossing the $10 Billion Threshold is Now a Lot Less Ominous, but There is Still a Price to be Paid
The revisions to asset thresholds are not limited to those affecting smaller institutions and offer significant regulatory relief to institutions with greater than $10 billion in assets and less than $100 billion in assets. Such relief changes the calculus of whether to exceed the $10 billion threshold.

On the plus side, the $10 billion threshold at which financial institutions were previously required to conduct annual company-run stress tests, known as DFAST, has been moved to $250 billion in assets. In addition, publicly traded bank holding companies no longer have a regulatory requirement to establish risk committees for the oversight of the enterprise-wide risk management practices of the institution until they reach $50 billion in assets. We anticipate, however, that most if not all institutions near or exceeding $10 billion in assets will continue to maintain board risk committees and will be conducting modified forms of stress testing for safety and soundness purposes.

On the downside, and perhaps most important, is what the Growth Act did not change: financial institutions with assets over $10 billion in assets continue to be subject to the Durbin Amendment, the Volcker Rule and the supervision and examination of the CFPB. In addition, the regulatory benefits the Growth Act newly provides to community banks will be lost when the $10 billion asset threshold is crossed.

New Strategic Issues To Consider
Based on the changes described above, senior executives and boards of directors should continue to carefully consider the regulatory impact of growing (or possibly shrinking) their institution’s balance sheet. Such considerations may include:

  • How will the institution’s capital position change under the simplified capital rules applicable to qualifying community banks?
  • Will compliance with the Community Bank Leverage Ratio rule ultimately result in a more efficient capital structure, or result in a need for more capital, compared to compliance with the current multi-faceted capital requirements?
  • Will near term compliance with a simplified Community Bank Leverage Ratio be outweighed by the cost of transitioning back to the existing regime once $10 billion is assets is achieved?
  • Given the institution’s loan portfolio and target market, would the institution benefit from the automatic qualified mortgage status now afforded to institutions under $10 billion?
  • Will the institution meaningfully benefit under the revised provisions of the Volcker Rule, and how might that affect the institution’s financial position?
  • Will the new benefits of being under $10 billion alter an institution’s strategic plan to grow over $10 billion, or is the relief from the company-run stress test and risk committee requirements enough to outweigh the regulatory relief provided to institutions under $10 billion?

Breaking Down Deregulation Based On Asset Size


deregulation-9-5-18.pngIn May, President Donald Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act into law, clearing the last hurdle for an expansive roll-back of U.S. banking regulations. The bill will relieve many of the nation’s banks from compliance and regulatory obligations imposed by the 2010 Dodd-Frank Act, adopted in the aftermath of the 2008 financial crisis.

The legislation benefitted from significant support from the banking industry, and in particular from the Independent Community Bankers of America and other representatives of community banks. Proponents of the bill assert that the oversight and compliance obligations imposed by Dodd-Frank disproportionately burdened community banks with the costs and organizational challenges associated with compliance, even though these institutions do not pose the same level of risk to the domestic or global financial systems as their larger national bank counterparts.

To address these concerns, the new law adjusts existing regulatory requirements to create a more tiered regulatory framework based on institution asset size, primarily by (i) removing certain compliance obligations to which community banks are subject, and (ii) increasing the threshold triggering application of some of the most stringent oversight and compliance requirements.

The most significant regulatory changes for community and regional banks resulting from the law include:

Under $3 Billion:
Raises the qualification threshold from $1 billion in assets to $3 billion in assets for: (i) an 18-month exam cycle for well-managed, well-capitalized banks, and (ii) the Federal Reserve’s Small Bank Holding Company Policy Statement.

Under $10 Billion:
No longer subject to the Volcker Rule enacted as part of Dodd-Frank. The Volker Rule restricts proprietary trading by FDIC-insured institutions, and imposes related reporting and compliance obligations on these institutions as a result. These reporting and compliance obligations reflected regulators’ belief that proprietary trading poses high systemic risk. But because it is typically only large national institutions that engage in proprietary trading, the community banking industry argued that smaller banks should not be subject to the Volcker Rule.

Deems certain mortgages originated and retained in portfolio as Qualified Mortgages if: (i) they comply with requirements regarding prepayment penalties, (ii) they do not have negative amortization or interest-only features, and (iii) the financial institution considers and documents the debt, income and financial resources of the customer. Qualified Mortgages are legally presumed to comply with Dodd-Frank’s Ability to Repay requirements.

Truth In Lending Act escrow requirement exemption for depository institutions that originated no more than 1,000 first lien mortgages on principal dwellings in the previous year.

Directs federal banking regulators to develop a Community Bank Leverage Ratio (equity capital to consolidated assets) between 8 and 10 percent. Banks exceeding this ratio will be deemed well capitalized and in compliance with risk-based capital and leverage requirements. Federal banking agencies may consider a bank’s risk profile when evaluating whether it qualifies as a community bank for purposes of the ratio requirement.

$10 Billion – $50 Billion:
No longer subject to mandatory stress testing or required to maintain risk management committees.

$50 Billion – $250 Billion:
No longer designated as “Systemically Important Financial Institutions” under Dodd-Frank. This designation triggers application of “enhanced prudential standards” under existing law, such as stress-testing and maintenance of risk management committees.

Institutions holding between $50 billion and $100 billion in assets will are exempt as of May 24, 2018, and institutions holding between $100 billion and $250 billion in assets will become exempt as of November 24, 2019.

Under $250 Billion:
Changes the application of High Volatility Commercial Real Estate (HVCRE) rules, which will now only apply to the 12 largest domestic institutions. Existing HVCRE rules apply broadly to loans made for the acquisition or construction of commercial real estate, unless one of a few exemptions applies. Loans categorized as HVCRE receive a higher risk-weighting under capital adequacy regulations, requiring the bank to hold more capital than for non-HVCRE loans. The banking industry argued the HVCRE definition was unnecessarily broad and the related guidance was redundant.

All Banks:
Exempts certain rural real estate transactions of less than $400,000 from appraisal requirements if no certified appraiser is available. Community banks argued that finding appraisers in rural areas can be difficult or expensive.

Depository institutions that originate fewer than 500 closed-end mortgages or open-end lines of credit will be exempt from certain disclosures under the Home Mortgage Disclosure Act.

The expansiveness of these reforms means a significant easing of U.S. bank regulations applicable to community and regional banks. Legislators have indicated that the Act may soon be followed by further regulatory changes. Regardless of future congressional action, the newly modified regulatory landscape will be new and very different for many banking institutions, especially those far from Wall Street and doing business on Main Street.

Crapo Bill Only a Drop in Bucket for Deregulation


regulation-8-29-18.pngThe bipartisan “regulatory relief” bill that was adopted by Congress and signed by President Donald Trump earlier this year is a positive development for the banking industry, and it continues a string of good news for banking (and, by extension, the economy at large) since the passage of the Dodd-Frank Act. Banking is highly regulated, and it should be, because most banks’ balance sheets are funded with federally insured deposits to the tune of 90 percent.

The Economic Growth, Regulatory Relief and Consumer Protection Act is not all that the industry had hoped for in a regulatory relief bill, but it is not a complete giveaway to the big banks as some suggested. For the really big banks in this country, the bill does not change much at all.

One of the best things about the legislation is the House and Senate came together to pass a bill that makes sense. On the other hand, the bill seems to further engrain buckets of banks based on asset sizes that have no meaningful support. So, we should get used to the notion that a bank with assets over $10 billion is somehow a “large” bank and that banks with over $250 billion in assets are “systemically important.”

At a high level, the substantive provisions of the new law are relatively brief, when compared to the expanse of Dodd-Frank. Arguably, the mortgage-related provisions of Dodd-Frank did more harm than good because plenty of smaller lenders got out of the housing finance business rather than risk the penalties of noncompliance.

The recent legislation provides that banks with assets of $10 billion or less can avoid some of the more cumbersome qualified mortgage rules under Dodd-Frank, provided that the loans are originated by the bank and kept in the bank’s loan portfolio. Banks that made fewer than 500 mortgage loans in each of the last two years will be exempt from Dodd-Frank’s expanded reporting under the Home Mortgage Disclosure Act as long as the bank has a satisfactory or better Community Reinvestment Act rating.

The new legislation also directs the federal banking agencies to adopt a “Community Bank Leverage Ratio” that will exempt most banks with assets of less than $10 billion from the risk-based capital rules of Basel III. This safe harbor capital requirement is to be not less than 8 percent and not more than 10 percent, and it is going to require an interagency rule-making process, which can take many months to accomplish. So don’t throw away your Basel III models just yet. Most of these so-called small banks will also be exempt from the Volcker Rule, but that too is going to require promulgating rules. It is just going to take time for to reach consensus on what the regulations should say.

A couple of provisions of the new law beneficial to smaller banking organizations should be implemented fairly quickly and without much controversy. The threshold for a “small” bank holding company for purposes of the Fed’s policy statement on the capital and leverage requirements for such entities has been raised from $1 billion to $3 billion. This means bank holding companies with less than $3 billion of total assets will not be subject to capital requirements on a consolidated basis, and allows those holding companies to borrow money at the holding company level and inject it into their subsidiary banks as equity capital. In addition, the exam cycle for well-managed and well-capitalized banks with assets of $3 billion or less has been extended to 18 months. These two provisions could amount to meaningful relief for the banking organizations that can avail themselves of the flexibility afforded by the new law.

For those of us who appreciate the important role that a properly functioning banking system plays in the U.S., our elected officials deserve credit for making changes to Dodd-Frank. But we should not lose sight of the fact that the new law is merely a drop in the bucket of work to be done around bank regulation in the U.S.

Why Deregulation Means More Work for Banks


regulation-8-20-18.pngMany banks are claiming victory over the promise of regulatory reform from bill S.2155, often called the Crapo Bill. However, the celebration and dreams of returning to the way it once was before the Dodd-Frank Act are premature.

There is still a long road for deregulation, with many obstacles. The bill’s limited scope and applicability, coupled with the uncertainty of the regulatory landscape, call into question the breadth and longevity of this so-called regulatory relief. Bankers must realize that any change, whether adding or reducing regulations, translates to extra work.

There’s nothing wrong with being cautiously optimistic about the potential for regulatory relief, but bankers should gain a deeper understanding of the details before declaring victory. Banks that work to comprehend the scope of the bill’s effects, the potential for political shifts, and what deregulation means for management will be better equipped to navigate the unpredictable regulatory landscape.

The nitty gritty: a not-so-sweeping reform
Many in the industry view the bill as enacting regulatory relief – and that’s where their understanding ends. Those who have properly digested the bill— whether bankers themselves or their regtech partners—have realized it isn’t the sweeping reform some claim. In reality, the bill is only a limited set of reforms, with restricted applicability and several distinctions based on asset size and product mix.

There is also confusion around timing and deadlines. Sections of the new law contain various effective dates, ranging from May 28, 2018, to three years from the enactment date. However, it is important to understand that regulatory relief differs from traditional rulemaking when it comes to effective dates. Typically, an effective date represents a deadline by which all implementation must be accomplished. For regulatory relief, the date represents the deadline by which a burden should be lifted or reduced.

Because of this discrepancy, questions remain around when the reduction of regulation is required versus when it is optional. This ambiguity is problematic, as some bankers will make changes right away, while others will wait until forced to do so. Complicating matters, software and technology updates won’t be readily available, causing friction in processes.

Furthermore, where provisions of the bill conflict with existing regulations, there is uncertainty about how the regulations will address these conflicts. How examinations will be conducted while there are inconsistencies between law and regulation are unclear at the time of this writing.

The unpredictable political landscape raises questions
Washington’s tendency to deregulate banking is not a surprise. The current leadership has created a “pro-business” sentiment that favors limiting regulations. But political whims can change quickly. With midterm elections in November, there is potential for a regulatory shift in the other direction. Some reforms and regulatory relief promised in the Crapo Bill may never come to fruition, depending on what happens this fall.

Instead of trying to predict political outcomes, bankers should remain diligent about complying with regulations already solidified. For example, CECL will have many ramifications for how banks handle themselves fiscally, and bankers shouldn’t let chatter around regulatory relief distract them from that upcoming deadline. Until we have a more definite sense of the political climate for the next two years, bankers will benefit from focusing on the regulations in front of them now, rather than what may or may not be coming from S.2155.

Deregulation means more work
Even if the trend continues, rolling back regulations isn’t as simple as it sounds. It will take just as long to undo portions of Dodd-Frank as it took to implement the rules. With technology challenges and limited flexibility at even the most progressive institutions, deregulation forces short-term pain without necessarily guaranteeing long-term gain.

With any change, institutions are forced through a complex management cycle. This includes retraining staff, upgrading technology, reevaluating risk and tweaking operational procedures. Significant adjustments follow any deviation from the norm, even with toning down or eliminating rules. Therefore, bankers will have to closely monitor the efforts of their vendors and work closely with regtech partners to interpret and respond to regulatory changes.

Technology can help navigate the pendulum swing of regulation by automating compliance processes, interpreting regulations and centralizing efforts. It has become too much to manage compliance with manual processes and the regulatory landscape is too complex and changes too quickly. An advanced compliance management system can help banks remain agile and ease the pain points associated with reconfiguring processes and procedures.

No matter the path of proposed deregulation, banks must quickly interpret and adapt to remain compliant. Banks that recognize the uncertainty of the current political arena and are realistic about the managing the work associated with the change – while closely collaborating with their regtech partners – will be better positioned to navigate the unpredictable days ahead.

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.

The Deregulation Promise Beginning to Bear Fruit


regulation-5-14-18.pngEd Mills, a Washington policy analyst at Raymond James, answers some of the most frequent questions swirling around the deregulation discussion working its way through Congress, the changing face of the Fed and other hot-button issues within the banking industry.

Q: You see the policy stars aligning for financials – what do you mean?
The bank deregulatory process anticipated following the 2016 election is underway. The key personnel atop the federal banking regulators are being replaced, the Board of Governors at the Federal Reserve is undergoing a near total transformation, and Congress is set to make the most significant changes to the Dodd-Frank Wall Street Reform Act since its passage. This deregulatory push, combined with the recently enacted tax changes, will likely result in increased profitability, capital return, and M&A activity for many financial services companies.

Perhaps no regulator has been more impactful on the implementation of the post-crisis regulatory infrastructure than the Federal Reserve. As six of seven seats on the board of governors change hands, this represents a sea change for bank regulation.

We are also anticipating action on a bipartisan Senate legislation to increase the threshold that determines if an institution is systemically important – or a SIFI institution – on bank holding companies from $50 billion to $250 billion, among other reforms.

Q: Can you expand on why Congress is changing these rules?
Under existing law, banks are subject to escalating levels of regulation based upon their asset size. Key thresholds include banks at $1 billion, $10 billion, $50 billion and $250 billion in assets. These asset sizes may seem like really large numbers, but are only a fraction of the $1 trillion-plus held by top banks. There have been concerns in recent years that these thresholds are too low and have held back community and regional banks from lending to small businesses, and have slowed economic growth.

Responding to these concerns, a bipartisan group in the Senate is advocating a bill that would raise the threshold for when a bank is considered systemically important and subjected to increased regulations. The hope among the bill’s advocates is that community and regional banks would see a reduction in regulatory cost, greater flexibility on business activity, increased lending, and a boost to economic growth.

The bill recently cleared the Senate on a 67-31 vote, and is now waiting for the House to pass the bill and the two chambers to then strike a deal that sends it to the president’s desk.

Q: What changes do you expect on the regulatory side with leadership transitions?
In the coming year, we expect continued changes to the stress testing process for the largest banks (Comprehensive Capital Analysis and Review, known as CCAR), greater ability for banks to increase dividends, and changes to capital, leverage and liquidity rules.

We expect the Fed will shift away from regulation to normalization of the fed funds rate. This could represent a multi-pronged win for the banking industry: normalized interest rates, expanded regulatory relief, increased business activity and lower regulatory expenses.

Another key regulator we’re watching is the CFPB (Consumer Financial Protection Bureau), which under Director Richard Cordray pursued an aggressive regulatory agenda for banks. With White House Office of Management and Budget Director Mick Mulvaney assuming interim leadership, the bureau is re-evaluating its enforcement mechanisms. Additionally, Dodd-Frank requires review of all major rules within five years of their effective dates, providing an opportunity for the Trump-appointed director to make major revisions.

Q: We often hear concerns that the rollback of financial regulations put in place to prevent a repeat of one financial crisis will lead to the next. Are we sowing the seeds of the next collapse?
There is little doubt the lack of proper regulation and enforcement played a strong role in the financial crisis. The regulatory infrastructure put in place post-crisis has undoubtedly made the banking industry sounder. Fed Chairman Jerome Powell recently testified before Congress that the deregulatory bill being considered will not impact that soundness.

Q: In your view, what kind of political developments will have effects on markets?
We are keeping our eyes on the results of the increase in trade-related actions and the November midterms. The recent announcement on tariffs raises concerns of a trade war and presents a potentially significant headwind for the economy. The market may grow nervous over a potential changeover in the House and or Senate majorities, but it could also sow optimism on the ability to see a breakthrough on other legislative priorities.

Be Careful Cheering On Mick Mulvaney Too Much


CFPB-5-4-18.pngThe Consumer Financial Protection Bureau has been a thorn in the side of the banking industry since its creation by the Dodd-Frank Act of 2010. The bureau’s authority to rewrite consumer regulations impacts even those banks below the $10 billion asset threshold it doesn’t supervise directly, so we imagine that many bankers are cheering on Interim Director Mick Mulvaney while his hawkish style bears fruit, or doesn’t, depending on your perspective.

But here’s the rub: These changes are occurring in a highly charged political atmosphere in Washington, D.C. So it was in 2010, and so it is today. The CFPB (and Dodd-Frank generally) was and remains a politically divisive issue in Washington.

Mulvaney is a former Republican congressman from South Carolina, and while he may truly believe that the changes he has wrought at the bureau are in the banking industry’s best interests, it’s hard not to see them as hawkish political cannon fodder boosting up an agenda that has drawn mixed reviews. So what happens if the White House flips to the Democrats in 2020? Will a new director reverse course and undo what Mulvaney has undone? In a couple years, will we rinse and repeat this all again?

Or, considering Mulvaney is still technically in an interim role, how much would his style and decisions shift if a different, less boisterous leader were put in place?

Bankers might not like regulation—and certainly the industry is obsessively regulated—but generally they accept the rules that are in place so long as they know what they are and have confidence they don’t dramatically change overnight.

Bankers generally favor less regulation for very good reasons—it costs a lot of time and money, which could arguably be better spent improving their products, performance, or the experience for their customers and shareholders. So a bipartisan review of the CFPB’s mission and methods would probably be a good thing.

But banks also function best in stable, predictable environments. And when a regulatory body is the target of political promises and potentially sweeping reform every two years, it creates uncertainty. And uncertainty doesn’t serve this industry well.

It’s impossible to know completely what the political landscape will look like a year, two or four down the road, but banks will remain, and regulators will remain, and the relationship between the two will remain. It only makes sense to keep those relationships stable.