Enterprise risk management: what it is and what to do about it

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?”


It’s time for Plan B for the banking industry, following failure of Durbin delay

Plan-b.jpgWith Congress voting down last week for the second time a delay in implementation of the Durbin amendment to Dodd-Frank, it’s time for the banking industry to move on.

Brian Gardner, an analyst with Keefe, Bruyette & Woods in Washington, D.C. wrote in a note to clients Thursday that Congressional action on the Durbin amendment is now “a dead issue.”

Karen Thomas, senior executive vice president for government relations and public policy at the Independent Community Bankers Association, said: “I think it’s going to have to rest for awhile.”

The Durbin amendment is estimated to wipe out $15.2 billion in annual debit card fee income by capping the fee banks can charge retailers for debit card transactions, according to R.K. Hammer Investment Bankers, a bank card advisory firm.

Although the regulation states only banks with more than $10 billion in assets will be impacted, many believe the impact will be felt even at much smaller banks, which Bank Director Editor Jack Milligan explained here.

Gardner expects the Fed to release its final rule on debit interchange fees within weeks (the rule takes effect July 21). Like other analysts, he expects the 12 basis point cap on fees to be the floor and that “the final rule will provide some relief to card issuers.”

Thomas said the Fed will have to consider the cost of fraud protection on debit cards, and she’s hopeful it will consider other costs as well.

So the focus has moved to influencing the final Fed rule, although at this late stage, that might be hard to do.

The bigger picture is that banks already have been making changes and will have a lot of work to do on their business models going forward: With slow economic growth, higher capital requirements and reduced fee income from products such as debit cards, how will some of them, especially the smaller banks, make money going forward?

Robert Hammer, chairman and CEO of R.K. Hammer in Los Angeles, argues that banks will now look for new sources of fee income.

“Fees will rise as an unintended consequence of the legislation, no matter how well intentioned the Durbin bill may have been,’’ he writes.

Among them, potential fees for customers who don’t use their debit cards very much. Already, banks have been scaling back rewards programs for debit card users.

But the fee issue is just one piece of the puzzle for banks that are looking now at the big picture of how to grow and make a profit in a slow economy.

Board members have become more engaged in these questions than in prior years, says Will Callender, a consultant for First Manhattan Consulting Group in New York.

“We are seeing more rigor around the strategic process,’’ he says. “In prior years, it was ‘we do (strategic planning) because we do this every year.’ Now, everybody is more involved and asking more questions. ‘What lines of business are critical? What’s our plan for growth or profitability?’”

What audit committees need to know


Robert Fleetwood, a partner in Chicago-based law firm Barack Ferrazzano who specializes in financial institutions, will be speaking at Bank Director’s Bank Audit Committee conference June 14-15 in Chicago.  Here, he discusses the increasing importance of audit committees understanding capital issues, the advent of risk committees, and the one thing all audit committee members should do.

What is the most important thing that audit committees should be focusing on in today’s environment?

I am always hesitant to say that there is one “most important” issue or factor on which audit committees should be focused. Proper governance and adhering to practical, sound procedures are always critical, and should never be dismissed or overlooked.

audit-mtg.jpgFrom an issue standpoint, it is critical that audit committees, as well as the entire board, understand the ever-increasing importance of capital in the industry’s current environment. The audit committee must understand the organization’s capital structure, the risks inherent within that structure, and the possible effects of Dodd-Frank, Basel III and the overall regulatory environment. As the past few years have illustrated, capital is key. An organization must have a clear plan regarding how to maximize its capital resources now, and how to keep its options open for the future. The audit committee can play a key and important role in that overall process.

How have the responsibilities for audit committees changed during the last few years?

One change that I have witnessed over the past few years is the audit committee’s evolving role in overall risk management. A few years ago, it was common to have the audit committee oversee the organization’s board-level risk management. As audit committees became more and more overwhelmed, enterprise risk management systems have developed and risk committees have become more common.

Recently, it has become more common that overall risk management is not centered with the audit committee, particularly at larger organizations, but instead with a risk committee or the board generally. This is filtering down to smaller organizations, but in my experience smaller companies still are more likely to have the audit committee involved in overall risk management practices. I expect that this trend will continue to evolve over the next few years.

Name a best practice that you would like to see more audit committees adopt.

There are actually a number of best practices that many audit committees do not adopt or implement, often for very good reasons. We stress that there is not a “one size fits all” when it comes to governance. Just because one of your peers implements something, does not mean that you have to adopt it, particularly if it doesn’t make sense within your organization.

One practice that is applicable to all companies, all boards and all committees, however, is the importance of having directors actively participate, ask questions and engage in meaningful dialogue with management, the company’s advisors and other directors. We often hear of situations in which directors have not asked any questions, or did not engage in any meaningful discussions, regarding important decisions affecting the company. Not only does this potentially hinder the decision-making process, but it may not allow the directors to adequately establish that they satisfied their fiduciary duties in the decision-making process. The lack of participation, or the lack of proper documentation of participation through meeting notes and other mechanisms, opens the organization, as well as the directors, to potential liability if the action ultimately has a negative impact on stakeholders.  


Regulators to bankers: Just talk to us

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.

What To Do About Risk Management When There Are No Clear Answers

For American Community Bank & Trust, a $590 million-asset institution located about 70 miles north of Chicago in McHenry County, Illinois, enterprise risk management (ERM) has steadily become a part of the culture and dialogue throughout the organization. Chief Executive Officer Charie Zanck admits that it will still require continual improvement over time, but knew she had to start somewhere.
A common theme throughout this year’s Bank Chairman/CEO Peer Exchange event was the topic of enterprise risk management and what exactly that means to today’s financial institutions. While many bank leaders are finding the term difficult to define, it is clear that the Federal Deposit Insurance Corp. will be focusing heavily on risk management processes and not just for the publicly traded and/or larger banks.


After much research and calls to the regulators, Zanck had come up empty in her quest to define what ERM was and what the industry standard best practices were for her to build upon at her institution. What she discovered was that it wasn’t easy, or simple, and there was no hallmark case or standard process. Now what?

Although it was hard to get started, Zanck knew that the old siloed or isolated approach to managing risk wasn’t going to work anymore. So she began to build out her own processes for assessing the risks in her organization, identifying the bank’s risk appetite in conjunction with the board, putting controls in place and determining how to best measure those risks.
American Community Bank & Trust ended up changing the way it looks at risk and has begun to apply those processes to not only specific areas such as IT or vendors, but also to their strategic and growth decisions. For example, when the management team wants to introduce a new product into the marketplace, it must first get the approval of the ERM committee, which looks at it from all different perspectives and asks the tough questions. That is the essence of enterprise risk management, and no one person can do it all, Zanck said. It requires a team of people from compliance, operations and senior management to fully assess the risk to the entire organization. Zanck then reports the findings to the board and audit committee.

Unfortunately, the regulators weren’t much help to Zanck despite their new mandate to monitor her organization’s risk. She sympathized with her fellow bankers, noting that this was why it was such a difficult process for her and her team. If the banks don’t figure ERM out for themselves, then it will surely get decided for them. The question is by whom?

Big banks still grapple with their own complexity, risk

puzzle.jpgThe world’s largest banks have made a lot of progress revamping how they handle risk in the wake of the financial crisis, but they keep bumping up against the limitations of their own technology.

That’s one of the more interesting conclusions from a report that came out this week from Ernst & Young and the Institute of International Finance, a global association of 400 financial institutions and agencies. This latest report is the second to monitor changes the group recommended in July 2008.

It’s a little less sexy than the issue of bank CEO pay, but still pretty important in light of the last few years of financial pain. How are the world’s biggest, most complex financial institutions able to understand the risks posed by their own balance sheets and do something about them?

Ernst & Young conducted the survey of the group’s membership between October and December of last year, resulting in 60 online survey responses and 35 interviews with bank executives at firms such as Bank of America, PNC Financial Services and the Royal Bank of Canada, among others.

The survey identified areas of the greatest “progress” in banking: 83 percent of banks surveyed said they increased board oversight of risk and strengthened the role of the chief risk officer, for example. (Most chief risk officers now actively participate in business strategy and planning).

Ninety-two percent of banks surveyed have made changes to liquidity risk management in the last two years and 93 percent have implemented new stress testing.

But more than 80 percent of respondents cited “problems with inefficient, fragmented systems that can’t ‘talk to each other’ to extract and aggregate the accurate, quality data needed to conduct stress testing across the enterprise,’’ the report said.

Many are struggling with the demands on the resources needed to execute what is often a manual process of conducting tests and gathering results across the portfolios and businesses. One executive told us it takes 150 people across the businesses to analyze the scenarios mandated by both the regulators and the board risk committee.

Ugh. The problems associated with risk management don’t get much better:

More than 50 percent of those interviewed rate their ability to track adherence to risk appetite as moderate. The reasons cited range from the lack of clarity around which metrics align with risk appetite, to ill-defined methodologies for capturing and reporting information, to poor data quality and inadequate systems.

Poor data quality and inadequate systems? These are the largest banks in the world, remember. Perhaps this is an issue that will take only a few years to iron out. This is definitely one of those problems that won’t get a lot of publicity, but will really matter in preventing the next financial crisis.

Federal Banking Agencies Offer Proposal to Reform Financial Institution Incentive Pay

Acting on a Dodd-Frank mandate, federal bank regulators have released proposed guidance establishing general requirements for the incentive compensation arrangements of a variety of covered financial institutions. The proposal implements Section 956 of Dodd-Frank, which requires the agencies to prohibit incentive pay arrangements that encourage inappropriate risks by providing excessive compensation or that could lead to a material loss. The application of Section 956 is limited to financial institutions with a $1 billion or more in assets, defining “financial institution” broadly to include all depository institutions, credit unions, broker-dealers, investment advisors, GSEs like Fannie Mae and Freddie Mac and the Federal Home Loan Banks. The rules cover all programs that offer “variable compensation that serves as an incentive for performance” and extends to all officers, employees, directors or 10 percent shareholders that participate in such programs. The proposal will be open for a 45-day comment period after publication in the Federal Register with a final rule expected to be in place by 2012.

Enhanced Reporting of Incentive Pay

The proposed regulation mandates enhanced reporting of incentive compensation arrangements to provide the agencies with a basis for determining whether an institution’s pay practices violate the prohibitions on excessive compensation or encourage inappropriate risk that could lead to a material loss. All covered financial institutions would be required to submit an annual report describing the structure of their incentive pay arrangements in a clear narrative format along with a discussion of the institution’s policies and procedures relating to the governance of incentive pay programs. However, for institutions with less than $50 billion in assets, the regulation does not require reporting of an individual executive’s actual compensation. Institutions with assets of $50 billion or more (large covered institutions) would be required to provide additional specific information on policies and procedures applicable to the determination of incentive compensation for executive officers (see below) and certain other employees identified by the board of directors as having the ability to expose the institution to losses that are substantial in relation to the institution’s size, capital or overall risk tolerance. Large covered institutions would also be required to report on material changes in their incentive pay program since the prior year’s report and to detail the specific reasons why the institution’s incentive pay practices do not provide excessive compensation or encourage inappropriate risk that could lead to a material loss.  

Prohibited Practices

The proposed rules identify two classes of prohibited incentive pay practices: (i) programs that encourage unnecessary risk by providing excessive compensation and (ii) programs that encourage inappropriate risks leading to material financial loss.

Excessive Compensation . The agencies define “excessive compensation” as amounts paid to a covered individual that are unreasonable or disproportionate to the services performed, taking into account a variety of factors, including (i) the individual’s total compensation (both cash and non-cash), (ii) the individual’s compensation history, (iii) the institution’s financial condition, (iv) peer group practices, and (iv) the individual’s connection to any fraudulent act or omission.

Material Financial Loss . The proposed rules ban incentive pay arrangements that encourage either covered individuals or groups of covered individuals to take inappropriate risks that could lead to a material financial loss. The guidance does not identify specific arrangements that fit within this category but makes reference to the three principles identified in the agencies’ prior Guidance on Sound Incentive Compensation Policies released in June 2010: (i) balance of risk and financial reward through the use of deferrals, risk adjusted awards and reduced sensitivity to short-term performance, (ii) compatibility with effective controls and risk management and (iii) support by strong corporate governance, particularly at the board or board committee level.

Deferral Requirements for Large Covered Institutions

For large covered institutions, the proposal requires that at least 50 percent of annual incentive compensation for “executive officers” be deferred for at least three years. The proposal defines “executive officer” fairly narrowly to include only persons holding the title (or function) of the president, chief executive officer, executive chairman, chief operation officer, chief financial officer, chief risk officer or the head of a major business unit. Deferred amounts are also subject to adjustment for actual losses or by reference to other aspects of performance that are realized or become known over the deferral period. The rules allow the deferred amounts to cliff vest, i.e., no vesting or payment prior to three years, or on a graded schedule, i.e., one-third vesting and paid each year of the deferral period.

High Risk Employees

The agencies are also requiring the board or a board committee at large covered institutions to identify persons other than executive officers who have the ability to expose the institution to losses that are substantial in relation to the institution’s size. For such persons, any incentive arrangement is subject to documented approval by the board or a board committee and the board or committee must make a specific determination that the arrangement (i) effectively balances the financial rewards to the employee and the range and time horizon of the risks associated with the employee’s activities, (ii) includes appropriate methods for ensuring risk sensitivity such as deferral, (iii) provides for risk adjustment of awards and (iv) is structured to reduce sensitivity to short-term performance.

New Governance Requirements for Incentive Pay

The proposal also mandates specific governance requirements for the implementation and operation of incentive pay arrangements. All covered institutions are required to adopt board-approved policies and procedures that are designed to ensure continuing oversight of compliance efforts. Specifically, the rules require (i) the inclusion of the institution’s risk management personnel in the incentive pay design process, (ii) ongoing monitoring of incentive pay awards and required risk-based adjustments, and (iii) the regular flow to the Board of critical data and analysis from management and other sources to allow the Board to assess the consistency of incentive pay programs with regulatory requirements.

For covered institutions, regardless of size, we recommend an immediate assessment of how the proposed rules will impact your existing incentive arrangements and a review of related corporate governance practices. The early identification of covered officers and an analysis of the viability of current incentive pay programs under the new rules will help ease the transition to a compliant structure.


Taking the Long View on Regulatory Relations

two-man-facing.jpgWhen FDIC Chairman Sheila Bair gave a speech last month at the American Bankers Association’s Government Relations Summit in Washington, D.C., she got into what the American Banker newspaper characterized as some “testy” exchanges with the audience while taking questions after her prepared remarks, particularly on topics like the Dodd-Frank Act and a proposed reduction in interchange fees.

Given the tone of the Q&A session, one could reasonably conclude that the state of “government relations” between bankers and the federales smells like sour milk right now. Certainly, banking regulators have been playing hardball over the last two years with institutions that are dangerously undercapitalized or have been slow to address their deteriorating asset quality. If the regulators were asleep at the switch during the real estate bubble in the mid-2000s, they probably overcorrected once the bubble burst.

To paraphrase Claude Rains in “Casablanca,” regulators were shocked – shocked! – to discover that highly leveraged banks were piling up concentrations in commercial real estate loans that turned out to be extremely dangerous.

But this is not the first time in my memory that federal banking regulators have cracked down hard on financial institutions after a period of, shall we say, benign supervision. Back in the late 1980s, after the so-called thrift crisis, Congress passed the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) that among things abolished the old Federal Home Loan Bank Board – the thrift industry’s prudential regulator – and replaced it with the Office of Thrift Supervision. FIRREA was detested nearly as much as the Dodd-Frank Act is today, and the OTS used the law’s higher capital requirements to put a lot of highly-leveraged thrifts out of business. It struck many people back then as an example of frontier justice with the OTS playing the roles of sheriff, judge and hangman.

The point is, what’s happening today isn’t new. If you watch the banking industry long enough, you’ll see everything at least twice, including things that everyone swore the first time would never happen again.

Like it or not, the regulators have a job to do. Many banks became too reliant on real estate lending during the bubble, and once it popped they needed to raise capital so they could afford to charge off their worst loans. Based on what I have heard from bankers, lawyers and investment bankers, the regulators haven’t been willing to allow marginal institutions to earn their way out of their asset quality and capitalization problems, but have been forcing the issue in many instances. As much as they dislike Dodd-Frank or the proposed limits on interchange fees, I believe that much of the tension between banks and their regulators derives from regulatory activism at the grass roots level.

It won’t always be this way. The industry’s asset quality will gradually improve as the economy strengthens, most undercapitalized banks will either figure out a way to raise capital or will sell out to a stronger competitor, and the regulators will ease up. CEOs and directors may not like this oscillation between supervision sometimes being too soft and sometimes being too tough, but it seems to be a normal phenomenon in banking.

After living through one of the worst financial crises since the Great Depression, I am sure that all of federal banking regulatory agencies have felt pressure to tighten up their supervision. And while privately they might chafe against the heightened scrutiny, smart CEOs and their boards don’t go to war with their institution’s regulators. Instead, they consult with them frequently, communicate regularly and take a proactive approach to problem solving.

Smart bankers take the long view of regulatory relations. And that certainly doesn’t include picking a public fight with the chairman of the FDIC.

Consumer Financial Protection Bureau chief faces Republican critics

Elizabeth Warren, the special advisor setting up the new Consumer Financial Protection Bureau, fought back challenges from Republicans during a subcommittee hearing Wednesday of the House Financial Services Committee.

Warren, who declared that the foreclosure crisis would not have occurred if the Consumer Financial Protection Bureau had been in place six years ago, kept her poise during a barrage of questions from Republican lawmakers concerned about her authority and the potential impact on banks.

“You are directing perhaps the most powerful agency that’s ever been created in Washington,’’ said Rep. Spencer Bachus, R-Alabama, who is chairman of the House Financial Services Committee, saying Warren or the person ultimately appointed to head the agency will get to decide what’s an abusive practice in financial services and what’s not.

“We almost have to have good faith in your integrity and judgment,’’ said Bachus, who introduced legislation today that would create a five-member bipartisan commission to run the bureau instead. “That’s quite a burden for you and quite a burden for us.”

He pointed out that the agency has a $300 million annual budget, about the size of the Federal Trade Commission.

Other Republicans questioned why Warren was involved in discussions with the U.S. Department of Justice and 50 states attorney generals about a possible settlement over mortgage fraud accusations with mortgage servicers, even though the Consumer Financial Protection Bureau doesn’t have enforcement powers yet.

Warren defended her actions, saying she had been asked for advice by the Department of Justice and the U.S. Treasury, and she was simply giving her advice, although she declined to divulge details of the conversations.

She also said the Congress set up the Consumer Financial Protection Bureau to be headed by one person, instead of a board, to increase efficiency.

It is crucial, she said, that “we have a real cop on the beat.”

She said the consumer protection authority of the Federal Reserve and other banking regulators will be transferred to the Consumer Financial Protection Bureau on July 21.

In answer to a question about current financial regulators efforts to protect consumers, she said:  “The evidence is fairly clear that they did not do their job.”

She also sought to emphasize that the agency’s goal was to make financial products’ pricing and risk clear to consumers; and that her agency didn’t have the authority to regulate financial products such as mutual funds.

“There are many people who have figured out how to return incredible profits and revenues, into the tens of billions of dollars, selling products, car title loans, remittances, we could go on and on, without making the risks and pricing clear upfront,’’ she said, “making it impossible to compare one product with two or three others.”

Republican Steve Pearce, from New Mexico, lambasted her for not giving the straightforward and clear, concise answers to the committee members she was demanding of financial companies.

“What damn business is it of yours if I want to borrow $100 and pay back $120?” he asked.

Bankers Are Starting to See the Glass Half Full

Things are looking up. The tide of optimism has definitely turned since the first quarter of this year. In our recent survey of bank executives, 45% say they believe the U.S. economy will improve within the next six months. This demonstrates a sizeable increase from the 24% who were similarly optimistic in our first quarter 2010 survey. While the bulk of respondents are still in the camp that believe the economy will likely remain the same over the near term, (44%), we noted a drop by nearly half among those who believe that harder times are still ahead (11%, compared to 20% six months earlier).

Moreover, among those who were asked how well their local economies are faring, a similar strain of optimism is found. Thirty-five percent (compared to 22% in the first quarter) believe their local economy is poised to improve, and only 9% (compared to 18%) believe things will get worse within the next six months.

Compliance concerns remain high. Among the concerns that bank executives have over the next 12 months, regulatory concerns overwhelmingly stand out above the rest. Fully 87% of bank executives ranked regulatory burden as a major concern over the next 12 months—nearly 30 points higher than the next, most pressing concern: exposure to commercial real estate losses (58% ranked it as a major concern.) In third place, but much lower than either of the first two, was a concern over retaining quality talent (37% ranked as a major concern.)

Watch out for commercial real estate. The largest percentage of bank executives surveyed (35%) believe the shoe will drop on commercial real estate values sometime within the next 12 months, but that opinion is far from unanimous. Another quarter of the surveyed group (25%) believes commercial real estate values already have bottomed out; and another 24% believe it will happen in the next six months. Not surprisingly, perspectives on this question have a lot to do with one’s region. Forty-two percent of the central region think their values have already bottomed out, compared to only 10% of bankers in the southern region and 18% of those in the western region who think so.

Who is raising capital? With the regulatory scrutiny placed on capital standards in the wake of the financial crisis, we asked bank executives to tell us their anticipated plans with regard to capital raises in the next 12 months. Less than a quarter of the total surveyed (22%) say it is very likely they’ll go to the market to raise capital, but a higher percentage of those from the still-troubled Southeast (37%) say they’ll do so. The majority (67%) say such action is not likely in the next 12 months. Finally, a small group (11%) said they had already successfully undergone a capital raise.

For the complete survey results and graphic analysis, watch for Bank Director’s third quarter issue mailing later this month.