Federal regulators are feeling the heat from community bankers fed up with the burden of increased regulations, and two of them made efforts to appease a crowd in Nashville last week attending the Independent Community Bankers of America National Convention and Techworld. More than 3,000 people attended the convention.
The Federal Deposit Insurance Corp.’s Acting Chairman Martin Gruenberg said he has begun a series of roundtables with small banks in each of the six FDIC districts across the country, and will review the exam and supervision process to make it better and more efficient.
“We are going to work very hard to understand community banks better,’’ he said. He added that he didn’t want to raise expectations unrealistically, but he thinks the agency can do better.
Bankers have been bristling under the weight of increased regulation following the financial crisis, including the passage of the Dodd-Frank Act in 2010 that has new rules for everything from compensation practices to the creation of a new Consumer Financial Protection Bureau that will define and forbid “abusive practices” among financial institutions.
Although many of the new regulations are supposed to apply only to large institutions, with the CFPB applying to banks and thrifts with more than $10 billion in assets, Eric Gaver, a director at $500-million asset Sturdy Savings Bank in New Jersey, said he’s skeptical.
“The general trend is [regulations meant for big banks] become a best practice for small institutions on future exams,’’ he said.
Regulatory exams have been a crucial point of frustration, as more than 800 banks and thrifts are on the FDIC’s list of “problem” institutions requiring special supervision. In response, U.S. Rep. Shelley Moore Capito (R-West Virginia), and Carolyn Maloney (D-New York) introduced last year the Financial Institutions Examination Fairness and Reform Act (H.R. 3461), which would allow bankers to appeal exam decisions to a separate ombudsman.
The ICBA is supporting the idea of a separate appeals process and ombudsman.
However, Acting Comptroller of the Currency John Walsh stood up before the ICBA crowd Tuesday and defended the existing review process in the face of the proposed legislation.
“We have long supported the notion that bankers deserve a fair and independent review,’’ he said, adding that the Office of the Comptroller of the Currency (OCC) Ombudsman Larry Hattix is independent of the supervisory process and reports directly to Walsh.
Appeals can be viewed on the OCC’s web site, which lists only five appeals since the start of 2011. Of those, the ombudsman sided with examiners in four of the five.
Walsh said that “as regulators, we don’t expect to be loved,” but that he can promise there shouldn’t be any surprises about how the OCC approaches the exam.
Walsh disputed rumors that regulators want to reduce the number of community banks and thrifts in the country.
“I can assure you the OCC is deeply committed to community banks and thrifts and the goal of our institution is to make sure your institutions remain safe and sound and able to serve your communities,’’ he said.
Few pieces of legislation in recent years have riled up the financial services industry as thoroughly as the Dodd-Frank Act. And the white hot center of that controversial law is probably the new Consumer Financial Protection Bureau (CFPB), which the Act created to police the marketplace for personal financial services. If you’ve been reading the news lately, you know that the CFPB has a new director—former Ohio Attorney General Richard Cordray—who received a sharply-criticized recess appointment recently from President Obama. Senate Republicans had refused to hold confirmation hearings on Cordray until certain changes were made to the agency’s organizational structure, and Obama finally lost his patience and made Cordray’s appointment official while Congress was in recess.
If you have been paying attention, you also know there’s a difference of opinion between Senate Republicans like Majority Leader Mitch McConnell (R-Kentucky) and the White House over whether Congress was technically still in session, so the legality of Cordray’s appointment might be challenged in court. It’s also entirely possible—perhaps even likely—that the CFPB will be legislated out of existence should the Republican Party recapture the White House and both houses of Congress this fall. No doubt many bankers, their trade associations and the U.S. Chamber of Commerce would like to see that happen.
On the other hand, if the president wins reelection, I am sure he would veto any such bill that might emerge from a Republican controlled Congress, should the Republicans hold the House and retake the Senate this fall, which is possible but by no means assured. And if you give Obama a 50/50 chance of being reelected—which is my guess at this point having watched the Republican presidential race closely—then you can reasonably assume the CFPB has a 50/50 chance of surviving at least until January 2016.
And I think that’s a good thing.
This probably puts me at odds with most of Bank Director magazine’s readers. There’s no question that Dodd-Frank, combined with a variety of recent initiatives that have come directly from agencies like the Federal Reserve, will drive up compliance costs for banks and thrifts. And the CFPB‘s information demands alone will be a component of those higher costs. However, I have a hunch that what scares some people the most is the specter of a wild-eyed liberal bureaucrat imposing his or her consumer activist agenda on the marketplace. I don’t think Cordray quite fits that description, based on what I’ve read about him, but obviously we won’t know for sure until he’s been in the job for a while, so the naysayers’ apprehension is understandable. At the very least he seems determined to get on with the job, so we should know soon enough what kind of director he will be.
Here’s my side of the argument. Among the primary causes of the global financial crisis of 2008, which was precipitated by the collapse of the residential real estate market in the United States, were some of the truly deplorable practices that occurred during—and contributed to—the creation of a housing bubble. Chief among them were the notorious option-payment adjustable rate mortgages and similar permutations that allowed borrowers to pay less than the amortization rate that would have paid down their mortgages, which essentially allowed them to buy more house and take out a bigger mortgage than they could afford to repay. Some of these buyers were speculators who didn’t care about amortization because they planned on flipping the house in two years. But many of them were just people who wanted a nicer, more expensive house than they could afford and figured optimistically that things would work out. And the expansion of the subprime mortgage market brought millions of new home buyers into the market just when housing prices were becoming over inflated.
I’m not suggesting that the CFPB, had it been in existence during the home mortgage boom, could have single-handedly prevented the housing bubble. The causes of the bubble and the financial panic that eventually ensued were many and varied, including the interest rate policies of the Federal Reserve, the laxness on the bank regulatory agencies when it came to supervising the commercial banks and thrifts, the laxness of the Securities and Exchange Commission when it came to supervising the Wall Street investment banks and the fact that no one regulated the securitization market. But an agency like the CFPB, had it been doing its job, would have cracked down on dangerous practices like the so-called liar loans, or loans that didn’t require borrowers to verify their income. It would have put an end to phony real estate appraisals that overstated a home’s worth, making it easier for borrowers to qualify for a mortgage. And it would have been appropriately suspicious of option-ARMs if a super-low teaser rate and negative amortization were the only way that a borrower could afford to buy a home.
The CFPB is not a prudential bank regulator and will not focus on bank safety and soundness like the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. But in cracking down on some of these dangerous marketplace practices, the CFPB might have reigned in institutions like Wachovia, Washington Mutual, IndyMac and Countrywide that ultimately failed, or were forced to sell out, because it would have discouraged many of the shenanigans that helped feed the housing bubble.
Of course, many of the unsound practices that helped inflate the bubble were widespread outside the banking industry, and one of the CFPB’s principal—and I would say most important—duties will be to regulate the mortgage brokers and nonbank mortgage originators who accounted for a significant percentage of origination volume during the housing boom. Banks and thrifts should benefit greatly from this effort if it leads to the creation of a level playing field where nonbank lenders can no longer exploit the advantages of asymmetrical regulation.
A truism of our financial system is that money and institutional power will always be attracted to those sectors that have the least amount of regulation. For all intents and purposes, both the gigantic secondary market and the large network of mortgage brokers and nonbank mortgage lenders went unregulated during the boom years, and this is where the greatest abuses occurred. (Dodd-Frank also addressed the secondary market, although the jury is out whether its prescribed changes will work. Indeed, at this point it’s unclear whether the secondary market for home mortgages will ever recover.)
In hindsight, having two mortgage origination markets—one highly regulated, the other unregulated—was asking for trouble. And that’s exactly what we got.
Each U.S. bank holding company and foreign banking organization with more than $50 billion in consolidated assets and each nonbank financial institution deemed systemically important by the Financial Stability Oversight Council must submit a resolution plan, or “living will” for the “rapid and orderly resolution in the event of material financial distress or failure.” A likely deadline is July 21, 2012.
Each institution required to submit a resolution plan also must submit, on a periodic basis, a credit exposure report. These reports will be critical in the assessment of systemic risk.
The Federal Reserve and Federal Deposit Insurance Corp. have proposed rules with more detailed plan requirements and specifics on credit exposure reports. A final rule is due by January 21, 2012.
The plan must explain:
The structures and procedures in place to protect an insured depository institution subsidiary from the risks arising from activities of any nonbank affiliate
Ownership structure, assets, liabilities, and contractual obligations
Cross-guarantees tied to different securities, major counterparties, and a process for determining to whom the collateral of the company is pledged
Reorganization or liquidation in bankruptcy
The plan should anticipate the needs and duties of the Federal Reserve and the FDIC and support two functions:
Identify material exposures to major counterparties
Describe the riskier components of the institution
Identify market and liquidity risks
Gather information to perform horizontal supervision
Develop stress scenarios and potential solutions
Describe a hypothetical Chapter 7 and Chapter 11 proceeding
Consider which businesses to market pre-liquidation
Analyze the usefulness of a bridge bank
Assess short-term liquidity needs
Identify and prepare for impact of failure on other institutions
Appoint full-time living will team
Establish a reporting and oversight structure that includes input from enterprise risk management, treasury and finance, and legal
Designate board members to monitor process
Organize data collection
Major Tasks Strategic analysis
Identify likely stressors
Analyze failure of particular entities, and that of the whole institution
Assess private sector solutions
Devise bankruptcy alternatives
Establish methods for protection of the bank
Corporate governance structure for resolution planning
Develop central planning function headed by senior management
Coordinate communications and reporting to board of directors
Overall organizational structure
Describe material entities and core business lines
Explain inter-affiliate relationships, including risk transfers
Provide financials, including on- and off-balance sheet items
Management information systems
Develop a process for efficient and timely data gathering
Determine who will maintain access to specific data
Describe capital and liquidity sources
Identify exposures to major counterparties, including short-term funding, derivatives and other “qualified financial contracts,” and collateral arrangements
Determine the effect of a failure of a major counterparty
Analyze reliance of one affiliate on another for capital, funding, or services
SELECT LEGAL ISSUES
Does the plan sufficiently address management of the institution’s risks, especially liquidity, counterparty, and market risks?
How would other supervisory tools affect execution of the plan?
How will emerging regulations affect the operations of the institution?
Should any restructuring be considered?
How will cross-border operations be addressed in the plan?
Bankruptcy and Restructuring
How would the institution be liquidated under Chapter 7 or restructured under Chapter 11 of the U.S. Bankruptcy Code?
What authority and duties would current directors and officers have?
How would counterparty rights in bankruptcy differ from those under Title II of the Dodd-Frank Act?
How does the institution avoid a replay of the Lehman bankruptcy?
What should the plan include in order to minimize the likelihood that Title II’s Orderly Liquidation Authority will apply?
What are the creditor relationships underlying outstanding debt instruments?
Which instruments are realistically available to recapitalize the institution?
What duties do directors and officers owe in preparing the plan?
What duties apply when an institution is failing?
What are the material counterparty relationships?
Are there unusual considerations in unwinding particular positions?
What law governs each of the trading agreements and any credit support arrangements?
To what extent are close-out and netting provisions enforceable in the relevant jurisdictions?
What is the effect of a restructuring on deferred tax assets?
How do intercompany tax sharing agreements work in stress scenarios?
Do technology contracts provide maximum protection in a liquidation or restructuring?
When the Federal Deposit Insurance Corp. sued Washington Mutual’s executives in March over the bank’s failure, the government’s lawyers said they “took on enormous risk without proper risk management,” marginalized the chief risk officer, and pursued an aggressive lending policy despite being warned against it.
In part because of the financial meltdown at banks such as Wamu, regulators and bank boards are more interested in how risk is handled throughout an organization.
About 78 percent of financial institutions have adopted some kind of enterprise risk management program, according to the 2011 Deloitte Global Risk Management Survey, up from 36 percent who said so in the 2009 survey.
Regulators are asking more questions about what bankers are doing about risk, and more banks are starting the process of implementing an enterprise-wide program, according to speakers at Bank Director’s Bank Audit Committee conference in Chicago June 13-15.
Enterprise risk management is about more than just insuring against known risks. It’s about what could happen in the future that you don’t even know about, said Pat Langiotti, chairman of National Penn Bancshares enterprise-wide risk committee in Boyertown, Pennsylvania.
“What are you not monitoring? What is not on the agenda that could happen and what would the impact be, and what are we doing about that?” she said. “What risk are you taking and is there a reward for taking on that risk that’s adequate to the risk?”
Enterprise risk is about assessing all the risks of the institution, from operational, to information technology to reputational risk on an ongoing basis, establishing an appetite for risk, and making sure conformity to that risk appetite is monitored and pervades the institution.
Some banks, such as National Penn Banchsares, a $9.4 billion-asset publicly traded bank Boyertown, Pennsylvania, have a separate risk committee of the board to take responsibility for their enterprise risk management program, but some others handle it on the audit committee.
“I don’t think a risk committee is operating to make sure there’s no risk,’’ said Tony LeVecchio, the audit committee chairman of ViewPoint Financial Group, a $2.8 billion publicly traded bank in Dallas, Texas. “It’s more of an understanding of what risk you’ve agreed to take. What you don’t want is to find out ‘oh my goodness, I didn’t know we had a risk here?’”
The risk appetite has to be factored into the bank’s strategic planning, said Christina Speh, director of new markets, enterprise risk management at Wolters Kluwer Financial Services in Washington, D.C.
“There is nothing more frustrating than having a process and spending energy and time on something that doesn’t do anything,’’ she said. “If you have no idea how this fits into your strategic plan, it’s possible you’re just doing paperwork for regulatory agencies.”
“At the end of the day, the reason you’re doing this is because you want to ensure your bank is successful and meets your strategic plan,’’ she said. “You have a plan and you want your bank to reach this in five or 10 years. But how do you get there? And how do you put processes in place to make sure that if risks are realized, you’re able to handle that?”
Buying a failed bank can be a brutal experience. There may be opportunity to grow your bank, but there also is risk and hard work to do in a short amount of time. Plus, all that work can feel like a waste, if you lose the bid to buy. As the final post in a series on FDIC-assisted bank acquisitions, we’ve summarized advice for those considering such a deal from the final session of Bank Director’s May 2nd conference in Chicago:
Walt Moeling, partner in law firm Bryan Cave, says that bankers looking to do transactions “really need to focus on strategic planning in the big picture sense.” Are you large enough to handle the acquisitions you want to do? If you double in size, how many people on your team have ever worked at a bank that size? “You can see banks struggling with the staffing issue two years out,’’ Moeling says. He also tells bankers to communicate regularly, or start networks, with other bankers who have done FDIC-assisted deals. If you run into a problem, they might have advice. Also, remember that communication isn’t great between all the different regulatory agencies. Don’t assume your regulator knows what the FDIC knows, and vice versa.
Jeffrey Brand, principal and an investment banker at Keefe, Bruyette & Woods, says figure out what the costs of bidding for a bank will be, emotionally and financially, and develop a team with clear responsibilities. “It’s a very intense, two-week period,’’ he says. “You get very invested in the process. You might not win (the bid), and you need to be prepared if the wind comes out of the bag.”
Rick Bennett, a partner at accounting firm PricewaterhouseCoopers, tells bankers that FDIC-assisted deals continue to be highly accretive to bank balance sheets. The more acquisitions a bank makes, the easier the process becomes. But some bankers underestimate the amount of people and resources needed to acquire failed banks. “Ask yourself, if I am successful, what does that mean for me from a resource perspective as well?” he says.
Ameris Bancorp sits squarely in ground zero for the bank financial crisis: Georgia. But unlike its peers getting gobbled up by the FDIC and competitors, Ameris Bancorp is growing after buying six of its weakened peers since the fall of 2009, taking branches and market share in Georgia and Florida.
The Moultrie-based bank has gone from having $2.4 billion in assets at the end of 2008 to $2.97 billion in the first quarter, essentially driven by acquisitions of failed banks in the region at a time when traditional banking had come to a standstill.
“We couldn’t find any good customers to grow the balance sheet,’’ said Dennis Zember, executive vice president and chief financial officer of Ameris, at a Bank Director conference May 2nd in Chicago.
Left: Jeff Schmid; Right: Dennis Zember
With the acquisitions, the bank took $1 billion in assets at fair value and $52.4 million of bargain purchase gains, essentially the value of the assets beyond what was paid for.
The FDIC took 80 percent of the losses for each failed bank, while Ameris is responsible for disposing of the bad assets over time.
It hasn’t been a cake walk.
In one instance, the FDIC allowed only five Ameris bankers two and a half days to walk into a failing bank’s branches and assess what they were buying before the sale. One Ameris banker wrote down the addresses for every piece of real estate on the loan books and emailed them to colleagues so they could drive around and look at them.
Other bankers have had unwelcome surprises.
One of the clients of attorney Jim McAlpin of Bryan Cave bought a failed bank, but found out after the closing that half of the drive-through teller infrastructure and half of the parking lot had been sold by the bank in a last ditch effort to raise capital.
The FDIC will tell you what it knows about the bad bank, but it doesn’t know everything, he said.
Jeff Schmid, the chairman and chief executive officer of Mutual of Omaha Bank, which has become a $5 billion bank in five years after buying failed banks, said a lot of banks aren’t worth buying, but his bank still looks at every institution that comes up for sale. Many banks have little value because they’re only a few years old and funded real estate loans almost exclusively through brokered deposits, so do not have a sustainable deposit gathering franchise.
He urged bankers to be strategic in their acquisitions, identifying what they wanted and where to grow, before jumping after every failed bank that comes up for sale.
“You’ve got to decide where you want to go rather than fall in love with something that falls out on a sheet,” he said.
Schmid suggested doing research before banks end up on the FDIC’s for-sale list, finding out which banks have high Texas ratios, a sign of stress, in the regions where you want to grow. Then, go visit the executives.
“They’re worn out and their boards are worn out,’’ he said. “If a (traditional) sale doesn’t go forward, you’ll have so much more intelligence when the FDIC does put it on their list.”
FDIC contractor says more bank failures on the way
Michael Sher has a first-hand view on the nation’s bank failures. He is managing director of RSM McGladrey, which has various contracts with the Federal Deposit Insurance Corp., including assisting the FDIC in shutting down banks, and assisting them with managing and selling the assets. He discusses where FDIC-assisted deals go from here, and what mistakes bankers make when buying failed banks.
What do you do for the FDIC? To date, we and our strategic partner The Corvus Group, Inc. have assisted the FDIC in shutting down 59 failed financial institutions. Additionally, we are a contractor to the FDIC providing due diligence services to assist them in disposing of the assets that have been retained from the failed financial institutions. The first large deal was a $1.7 billion structured sale involving substantially non-performing acquisition and development loans. With a structured sale, the FDIC enters into a partnership with the buyer of the assets and typically, the FDIC retains a 60 percent ownership interest. The other transaction that we were involved with was a securitization backed by approximately $394 million of performing commercial and multi-family mortgages from 13 failed banks.
Do you think the FDIC will do more securitized asset sales in the future? As we move ahead, I think that the FDIC will focus more on securitizations. The cost of due diligence for buyers on a structured sale is substantial and the size of the loans pools historically have exceeded a billion dollars in unpaid principal balance. It is apparent that the interest in such large transactions has waned. The pricing received from the securitization sales is potentially higher than the other methods that the FDIC uses in disposing of assets from failed financial institutions. In addition, with a securitization, the FDIC does not retain an ownership interest that requires on-going monitoring. With structured sales, there is speculation that the size of the transactions will get smaller to encourage more participation.
Where do you think we’re headed in terms of bank closures? I don’t believe it’s over. If you look at the number of banks on the watch list, it’s roughly 10 percent of the banks in the country. How can this crisis be over when we have not seen an overall increase in real estate values? That being said, in my opinion, the number of banks going into receivership will decrease as I think that the FDIC will encourage banks to merge prior to a failure. A benefit to this is that the directors and officers may avoid being investigated by the FDIC subsequent to failure, and may avoid possible legal ramifications.
What’s really the demand for banks in hard-hit areas such as Georgia and Florida and Illinois? This is no different than the savings and loan crisis in the late ’80s and early ’90s. A lot of individuals and organizations made plenty of money buying distressed assets when others thought it was ludicrous to do so. I think that those who are not taking advantage of the distressed times now will be kicking themselves in the coming years because they missed the opportunity. Yes, you have to be cautious about what you buy, but those who get involved have the potential to make a lot of money.
How does the FDIC view the community banks who want to buy these failed banks, versus the big institutional investors? In my opinion, the FDIC views this banking crisis as the banking industry’s problem and is looking to the healthy banks to resolve it. Most of the institutional investors don’t have the experience or the know-how that the FDIC is looking for. I think the FDIC is somewhat reluctant to get these money players involved. The key is to have the right team in place to manage and dispose of the assets.
What sort of mistakes do buyers make in buying failed banks? I think one of the biggest mistakes made is buyers not having a full understanding of their rights and obligations under the loss share agreements that they have entered into with the FDIC. The acquiring banks have a short time-frame to truly understand what they have acquired and their reporting responsibilities under the loss share agreement. This results in the acquirers not fully understanding how to manage and/or dispose of the assets that they acquired.
The mess in banking isn’t over yet.That means hundreds of banks, most of them small, community organizations, likely will fail in the years to come. The flip side of all that carnage is an opportunity for bankers to buy troubled institutions, grow balance sheets during tough economic times and let the Federal Deposit Insurance Corp. take most of the bad assets of the failed bank.
The investment bankers and attorneys who attended Bank Director’s May 2nd conference in Chicago agreed on one theme: There are still plenty of deals to be had for banks looking to buy failed institutions from the FDIC, as long as they work hard, fast and smart to do the deals right.
“There is ample opportunity,’’ said Jeffrey Brand, managing director at investment bank Keefe, Bruyette & Woods. “The FDIC will allow you to bid as many times as you like and they will let you be as creative as you like.”
There were more than 523 banks with $318.3 billion in assets at the end of last year that had Texas ratios topping 100 percent, said Brand, using SNL Financial data. The Texas ratio is commonly used to predict bank failure, and is the amount of non-performing assets and loans, plus loans delinquent for more than 90 days, divided by tangible equity capital and loan loss reserves. If it’s more than 100 percent, that’s trouble.
The number of troubled banks also appears to be increasing. The number of banks with Texas ratios above 100 percent increased 4.5 percent from the third quarter.
The FDIC’s “problem” bank list also appears to be growing. It reached a record high for this cycle of 884 banks at the end of last year, more than 10 percent of the total banking system. That number was up from 860 the quarter before.
Louis Dubin, president of Resolution Asset Management Co., said the states with the most number of troubled banks are Georgia, Florida, Illinois and Minnesota.
Troubled Bank Map: 2010 Q4
TOTAL BANKS: 417 CRITERIA: Texas ratio > 100%, Leverage ratio <9%
Picking up failed banks from the FDIC offers some benefits: the FDIC can take on as much as 80 percent of the failed bank’s losses, using a tranche system based on the size of the losses. Plus, the acquiring bank can cherry pick the assets, locations and employees it wants. The failed bank’s pre-existing contracts are automatically voided on the sale.
And bankers can get creative in terms of how they structure deals. Brand recommended making several bids, including one that follows traditional FDIC deals and one that doesn’t. For instance, banks can price bids to take into account future risk, instead of using a loss share agreement, avoiding the hassles of regular audits from the FDIC to make sure they comply with the loss-share agreement.
“The FDIC is discovering the costs of auditing all these banks to see what their losses are,’’ Brand said. “Now they’re doing deals without loss share (agreements). You don’t need that expensive accounting system. But they are taking away that safety net, too. If losses are worse than estimated, that’s 100 percent coming out of your pocket.”
One of the drawbacks of FDIC deals is the possibility that the government could change the rules at any time. The loss share agreement lasts a decade for single-family housing assets; five years for commercial properties.
Buyers also don’t have much time to do due diligence. The entire process, from expressing an interest in acquiring a bank, to closing, can take about 90 days, less if the failed bank’s situation is dire.
“They don’t let you wander around the bank talking to all the lending officers,’’ said James McAlpin, an attorney and partner at Bryan Cave in Atlanta.
Bank employees will have to work quickly to make a bid and conduct due diligence. Plus, they must be able to reopen the bank on the Monday after the bank’s Friday closure, and follow timelines to transition the acquired bank and dispose of its assets.
“It is a tremendous strain on your organization,’’ Brand said.
Communication is key to every successful relationship. It’s also key in dealing with your bank regulator. During the last session at Bank Director’s annual Bank Chairman/CEO Peer Exchange in Chicago, the message from the panel of regulators was resounding: Please talk to us. Moderated by Paul Aguggia, partner at Kilpatrick Townsend & Stockton LLP, the session’s panelists included Bert Otto, deputy comptroller, central district at the Office of the Comptroller of the Currency, and Anthony Lowe, representing the Federal Deposit Insurance Corp. as regional director, division of supervision and consumer protection.
Aguggia set the stage for the discussion by painting a scenario of tension among the regulators and the banking industry. After a day and a half of in-depth discussions, bankers had reiterated that feeling of being in a constant state of fighting–fighting to reinstate good relations with regulators, fighting to get applications approved where there was no issue before, and fighting for the freedom to fix their own problems. Meanwhile, regulators are feeling the pressure from the public to protect the system and punish those who corrupted it.
Let’s Talk About It
In the eyes of both the OCC’s and the FDIC’s representatives, maintaining open and ongoing communication is the solution for ending the underlying tension between the two groups. Otto admitted that the regulators had not done a good job communicating with the industry before the economic fallout, but shared the government’s plans for reaching out more and listening to the bank’s concerns. It’s all about relationship building, if anyone expects the system to get fixed. Lowe echoed that sentiment by requesting that bankers maintain that dialogue throughout the year, rather than just before their examination. By keeping the lines of communication open, banks have more credibility in the eyes of the regulators and thus help to further cement the relationship.
During the session, a few attendees took the opportunity to test the communication theory and vented to the panelists about some challenges they were having with their examiners. Both Otto and Lowe suggested they take their concerns to the top, and not just let renegade examiners off the hook. They also warned that the regulators were going to be tougher during their exams, and that they were going to look long and hard at an institution’s high risk areas.
Handling the New Normal
Although examiners are taking closer looks at several areas, a few stood out: Interest rate risk and bank management. Does the bank have people with the right skills to handle environment changes? Will this institution be able to deal with the new normal?
Risk management processes are also high on their radar, as regulators look for good systems that allow banks to identify risks. After hearing some banks had no idea what examiners are looking for in terms of good risk management output, Otto explained that it’s about representing a level of commitment. What do the staffing levels look like for the audit and loan review teams? What is the long term strategic plan?
Signs of Improvement
However, a bit of good news from the regulators: There is a decline in the number of banks failing, the capital markets are loosening up, and there is stabilization in the real estate market. The FDIC has been releasing some institutions from formal threat and there are signs of overall improvements. Both Otto and Lowe acknowledged that the community banks are stressed by all the new regulations, but said that community banks are still important to this country, and there will be a market in which to successfully compete. The session ended on an optimistic note. And at least some communication had opened up between the regulators and the regulated.