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The Importance of Independent Consultants

Posted by Bobbe Sigler on Thu, May 08, 2014

Running your bank, you are thinking things are clipping along fairly well, maybe there are a few problems, but hey, who didn’t have problems during the “Great Recession”? Now your recovery is progressing nicely and you get an order or some other requirement to fulfill concerning some of the endless new regulations that are comingconsulting images out of Washington, D.C., Who is going to help you solve this problem? And help you get and stay compliant? The regulators have a few thoughts on using consultants we believe will help you…

An independent consultant can play a valuable role in assisting a bank’s management and board of directors in correcting significant violations of law, fraud, or harm to consumers. It is the policy of bank regulators to carefully consider whether to require an independent consultant in these cases and to evaluate the consultant’s independence, capacity, resources, and expertise and to monitor the consultant’s performance. This is a critical area when a national bank, federal savings bank, or federal savings association is instructed to employ independent consultants as part of an enforcement action to address significant violations of law, fraud, or harm to consumers.

The bank regulators evaluate the bank’s assessment of the independence of the consultant to establish that the consultant can perform its work with a high level of objectivity such that the results of the engagement are free of any potential bias and that the work is based on the consultant’s own independent and expert judgment. Any direct conflicts or facts that call into question the independent consultant’s integrity will cause the disqualification of the consultant. Examples of such direct conflicts include the use of a consultant that has previously reviewed the transactions that are to be evaluated in the current review or that has previously assessed the specific policies and procedures related to the violations or practices at issue. In addition to a direct conflict of interest, a bank should consider whether there is the potential for an appearance of a conflict of interest such that the consultant’s objectivity could be unduly influenced indirectly.

In particular, the Comptroller of the Currency (“OCC”) has used its enforcement authority to require banks to retain independent consultants in a significant number of cases and for a variety of purposes. For example, as part of enforcement actions, the OCC has required banks to retain independent consultants to assess the banks’ compliance with legal requirements in cases involving material violations of law. The OCC also has required the use of independent consultants when banks are obligated to provide restitution for violations of consumer protection statutes. The OCC has ordered banks of all sizes to retain independent consultants to

  • Address significant deficiencies with banks’ programs related to compliance with Bank Secrecy Act and anti-money laundering laws and regulations (BSA), including reviews of banks’ BSA staffing, risk assessment, and internal controls. The OCC has also ordered reviews by independent consultants of the adequacy of actions already taken by banks to address deficiencies in the BSA programs.
  • Review transaction activity to determine whether banks must file suspicious activity reports (SAR), whether SARs filed by banks need to be corrected or amended to meet regulatory requirements, or whether additional SARs should be filed to reflect continuing suspicious activity. The OCC has ordered similar reviews by independent consultants of banks’ currency transaction reporting.
  • Address significant consumer law violations, including violations of section 5 of the Federal Trade Commission Act regarding unfair or deceptive practices. Banks have also been required to hire independent consultants to identify affected consumers, monitor payments to such consumers, and provide written reports evaluating compliance with remedial provisions in enforcement actions.
  • Perform forensic audits in cases where the OCC has concerns about widespread fraud or systemic irregularities in banks’ books and records.

In addition, banking regulators have required banks to retain independent consultants to provide expertise needed to correct operational and management deficiencies rather than to address significant violations of law, fraud, or harm to consumers. By retaining consultants to perform these “functional” engagements, banks gain the additional knowledge, experience, and resources required to address deficiencies identified through the supervisory process. These engagements have been particularly valuable for community banks that may lack the necessary expertise and resources to correct the problems on their own.

When evaluating the independence of a consultant, including whether an actual or potential conflict of interest exists, the bank’s assessments should address the following factors:

  • Scope and volume of other contracts or services provided by the independent consultant to the bank. Specialized expertise of the consultant and availability of other consultants,
  • Proposed mitigating factors to address any potential conflict or appearance of conflict.
  • Any financial relationship, including the amount of fees to be paid, or previously paid to the person or company as a percentage of total revenue of that person or company, and any other financial interest between the bank and the proposed consultant.
  • Any business or personal relationship of the consultant, or employees of the consultant, with a member of the board or executive officer of the bank.
  • Prior employment of consultant staff by the bank.
It is important to remember that no single factor determines the outcome of the regulatory acceptance of a bank’s selection of consultant. It is all the factors collectively that are evaluated with the goal of ensuring that the services performed by the consultant, including its findings and recommendations, are expert and free of bias.

Topics: Great Recession, Bank Regulators, Independent Consultants

Bank Portfolio Management - Solve the Problems

Posted by Wendell Brock on Wed, Mar 10, 2010

It's a tangled mess in the financial jungle. In order to navigate the issues of portfolio management and compliance while still staying profitable and able to weather the market's unpredictable trends, financial institutions must arm themselves with the best information and resources. Yet many don't have either the knowledge or analytical resources to not only stay abreast of changing trends but also act on them in a timely and profitable manner. We have solutions.

New Rules, Economic Trends

A financial planner I know is now telling his older clients that the stock market is so volatile that it cannot be relied on as a stable platform for long term investing. Thus, the age-old saying that "assets are soft and debts are hard," has never been truer. In these difficult economic times, financial institutions need reliable information about their asset portfolio, including how the loans are matching up with the current value of the assets supporting the loans, along with the borrower's strength, all at a simple click of a mouse. 

By the time the CFO, CCO, CLO, CEO or any other member of the management team assembles enough information about the portfolio in a spreadsheet to make decisions, it seems the market may have changed enough to make the choice more difficult.  The analytics we can provide at a simple click of the mouse gives you 100 percent loan penetration and enough analytical information about your assets that your institution will have an objective defendable system to help manage the portfolio.  

Regulatory Requirements

The frequency and breadth of audits are increasing; requiring financial institutions to stay in a mode of continuous compliance, in one year's time they could be subject to internal and external loan review, IT audit, financial audit, CRA exam, and regulatory exams. Compliance is mandatory and with RiskKey, staying in continuous compliance is much easier.   

Industry Standards

There is a paradigm shift coming to financial institutions. Because lending is often formula driven, bankers need aggressively take on the roll of being asset managers. In addition to managing the loans in the portfolio, they need to manage the assets that support the loans. The tools and knowledge to help actively manage your portfolio are available with a simple, cost effective, mouse click!

Evaluate

With forward-thinking analytics, you can determine your portfolio's risk. These analytics provide a defensible probability of default within the portfolio, you can also stress test the portfolio along several different data inputs, including, percent of asset recovery, interest rate, fico score, and others. This basis can provide a direction as to the quality of the overall portfolio, all the while allowing the banker to zero in on the individual problem loans and assess their grade based on the institution's custom grading scale.

Act

Armed with a new, comprehensive understanding of your portfolio's risk, the analytics will subsequently locate the most pressing issues and provide options.

Assess

Finally, with your portfolio's risk evaluated and acted upon, you will have the tools and resources needed to clearly and concisely report your findings, to loan committees, the board of directors, and regulators.

Easy, Secure & Forthright

Working with us is simple. We take care of merging your data into a single platform. Your data will be protected and your analyses kept completely confidential. Our pricing is straightforward and simple.

People, Time & Action

Your employees should be generating revenue and managing accounts, not gathering statistics.  De Novo Strategy will allow your people to get back to profitable work. Our innovative practices are well beyond spreadsheets and simplistic reports. There's no laborious compiling of figures or making difficult assessments across a range of formats. Integrated reports and analyses mean less lag time between making a decision and executing it.

To learn more about Silverback Portfolio Analytics click and let us know. This will help you Build a Smarter Bank!

Topics: Bank, Bank Risks, regulators, Bank Regulators, Bank Asset, Regulations, Bank Policies, Compliance, Growth, real estate, Commercial Bank

Next-generation Compliance for Banks

Posted by Wendell Brock on Wed, Feb 17, 2010

Compliance. An issue most bankers don't relish. Often times it is explained away as a necessary evil! This approach makes difficult for the bank to stay on top of compliance issues and often leads to problems with examiners. This leads to compliance waves where the compliance officer works to get things ready for an exam or audit then the work load relaxes until the next exam or audit.

Based on the current state of affairs, most banks' find themselves overwhelmed with compliance workloads; they have limited staff and schedules, along with the increase demands from examiners, who want more risk management. Internal audits are conducted by just a few people, typically, they are reactionary, and they utilize outdated technology, if any technology at all. The workload is not slowing down anytime soon-if anything it is increasing.

What we propose is a complete rethinking of compliance-to what is called "Next-generation Compliance"-this is where banks are proactive with compliance rather than reactive. It smoothes out the waves and distributes the work throughout the organization, which makes the compliance load much lighter and much easier to manage. Such a change must happen on three levels: a bank's operational culture, their level of collaboration, and the technology used in audits.

I. Culture

  1. 1. Devise a compliance strategy
  2. Get executives onboard with the strategy
  3. Promote all team members to be proactive
  4. Create metrics to quantify the value of proactive compliance
    • Does compliance result in an increased speed of reporting?
    • Quality compliance management response?
    • The larger scope includes overall compliance simplicity?
    • Money and time saved?

 II. Collaboration

  1. 1. Include people from multiple departments in compliance audits
  2. Standardize process across all areas of compliance audits
  3. Be flexible, and have reasonable expectations
  4. Make your auditors business-focused, independent, strategists
    • They shouldn't be on an island
    • Promote productivity
  5. Communication with regulators
    • Involve them in the process early so they understand the improvements from the positive changes

III. Technology

  1. 1.Reassess your current compliance tools
    1. Is technology working efficiently for you?
    2. Break from the spreadsheet! You can't properly collaborate from a spreadsheet - there are easier ways
  2. Increase use of collaboration tools to centralize the compliance audit workflow
    1. With them, everyone can discuss and facilitate improved risk management
  3. Track the use of audit recommendations
    1. What good are recommendations if they aren't used?
    2. Provide continuous up-to-date analysis/status of risk management

Compliance and Banking

Regulators are asking for more risk management and compliance, but banks aren't able to address this increased workflow with more manpower. With tighter operating budgets, the solution is working smarter. Often times when a bank is not able, to deliver properly on compliance issues it results in the issuance of an MOU or a C&D to the bank. Restoration plans and strategies may be implemented and managed through continuous compliance.

If you're buying a bank, the regulatory hurdles are less. But modifying an existing bank's compliance processes requires a team effort; it's all about building a smarter bank!

If you're starting a bank, a culture of compliance can be built from the ground up as your institution evolves. A blank slate is easy to work with. But at the same time, new banks are subject to harsher regulatory scrutiny, which means compliance has to be a priority.

To learn more about Next-generation Compliance, click the link for more information. 

Topics: Buy a bank, Bank Risks, regulators, Bank Regulators, Bank Regulation, Regulations, Bank Policies, Risk Management, Bank Regulations, Building Smarter Banks, Start a bank, Smarter Banks, Restoration Plan, distressed banks, Compliance, Next-generation Compliance

Bair Says More Regulation is Needed

Posted by Wendell Brock on Mon, Nov 02, 2009

Sheila Bair argued to Congress last week that the government should "impose greater market discipline on systemically important institutions." Her rationale for the argument was that those large firms have been funded by the market as if they were too big to fail, while their management teams depended on faulty risk management practices; these circumstances, combined with ineffective regulation, created a the bulk of our current economic problems. Bair's commentary indicates that we will ultimately have much more regulation throughout the financial industry, simply because what happens to large institutions will trickle down to impact the smaller community banks.

Bair went on to say:

In a properly functioning market economy there will be winners and losers, and some firms will fail. Actions that prevent firms from failing ultimately distort market mechanisms, including the market's incentive to monitor the actions of similarly situated firms. The most important challenge now is to find ways to impose greater market discipline on systemically important financial organizations.

Shareholders, creditors to take losses

It is true that we need to create an effective, bailout-free system to unwind large failing institutions - and to do so without creating a financial tsunami that wipes out the rest of the economy. But the reality is that everyone will feel the impact of a large institution's failure. It is impossible that a CitiBank, Wells Fargo, Bank of America or Chase failure could result in only a slight ripple through the economy. Those closest to the institution will feel the pain the most and people on the far fringe, the least -- but it will be felt by all nonetheless. The government needs to stop trying to make our lives pain-free in all aspects of life. We simply cannot be shielded from ALL risks.

In the current meltdown, for example, shareholders felt the brunt of the financial crisis pain. Investing is an inherently risky enterprise, and to devise regulation that would soften the impacts of investment failure runs contrary to the tenants of our economic system. Because shareholders voluntarily took risks with the companies they invested in and supported, they should absorb the repercussions when those firms fail.

Bair agrees with this argument. She advises:

Under the new resolution regime, Congress should raise the bar higher than existing law and eliminate the possibility of open assistance for individual failing entities. The new resolution powers should result in the shareholders and unsecured creditors taking losses.

Bair also addresses the current priority given to secured creditors. Such creditors have, in the past, made credit decisions based on collateral value without thoughtfully considering creditworthiness as well. This puts the creditor at risk of default and forced liquidation, while encouraging lack of discipline in the market. Addressing this issue can help to minimize costs to receivership and spread out losses related to failures more broadly.

Other key points in Blair's testimony included:

  • Resolution of systemically important financial firm failures is currently managed through the bankruptcy process, where there is no protection for public interest.
  • Holding company affiliates are often dependent on the ongoing operations of systemically important firms. Regulation is needed to require these affiliates to have greater autonomy. Holding companies should have wind-down plans.
  • Open company assistance benefitting shareholders and creditors should be banned by Congress.
  • A Financial Company Resolution Fund should be established and pre-funded through assessments against large financial firms.
  • The FDIC should have authority to resolve "systemically important and non-systemically important depository institution holding companies, affiliates and majority-owned subsidiaries." This authority would allow the FDIC to maximize the value of the assets, particularly in cases where certain functions lie outside the FDIC's current authority.
  • The FDIC supports the creation of a powerful Financial Services Oversight Council to monitor and manage system-wide risks. The Council should be given a minimum rulemaking authority "that must be met and could be exceeded." The Council should oversee a group of regulators, but also have its own power to act if the regulators do not.
  • The full text of Sheila Bair's testimony can be found at: http://www.fdic.gov/news/news/speeches/chairman/spoct2909.html

    Topics: FDIC, FDIC’s, Bank Regulators, Commercial Banks, Bank Regulation, Bank Regulations, Troubled Banks

    The FDIC’s NEW Advisory Committee on Community Banking

    Posted by Wendell Brock on Fri, Oct 16, 2009

    In May of 2009, the FDIC authorized the creation of an Advisory Committee Community Banking with the purpose that this committee would help the FDIC understand the particular issues that small rural and urban community banks face in the ever-changing financial landscape.

    The committee is consists of no more than 20 volunteer members from the community banks around the country along with small business, education, non-for-profit organizations and other individuals that use the services of these community banks. It is expected that the committee will have an annual budget of $300,000 and two full time FDIC staff people committed to serving their needs. The committee charter will last for two years unless it is renewed by the FDIC. The committee will also report directly to the Chairman of the Board of Directors of the FDIC.

    The committee's first meeting was this week and below is the press release from that meeting. At the bottom is a link to the FDIC website where more information may be obtained about the meeting. We hope this positive for the community banking sector as they struggle under the weight of very difficult regulations, limited budgets, and with razor thin margins. They are scheduled to meet twice a year, so the next meeting should be in April.

    Press Release from the Advisory Committee on Community Banking

    At its first meeting since being established by the FDIC Board in May, the FDIC's Advisory Committee on Community Banking today discussed the impact of the financial crisis on community banks. Other issues addressed were regulatory reform proposals under consideration by Congress and their effect on community banks, the impact of FDIC supervisory proposals on these banks, and community banks' perspectives on funding the FDIC's Deposit Insurance Fund.

    "I was extremely pleased with the robust discussion among our committee members on issues that are so critical to both the FDIC and our nation's community banks," said FDIC Chairman Sheila C. Bair. "The committee members voiced a number of interesting ideas that they will pursue."

    The Advisory Committee was formed to provide the FDIC with advice and recommendations on a broad range of policy issues with particular impact on small community banks throughout the nation, and the local communities they serve. The committee is comprised of 14 community bankers from across the country, and one representative from academia.

    "We are fortunate to have so many highly respected professionals who are willing to volunteer their time and talents to help the FDIC analyze the issues most important to community banks," said Paul Nash, Deputy to the Chairman for External Affairs, and the Designated Federal Official for the Advisory Committee on Community Banking.

    The members' opinions on the FDIC's proposed rulemaking to prepay three years of deposit insurance assessments will be included in the public comment file.

    For more information on the Advisory Committee on Community Banking please visit http://www.fdic.gov/communitybanking/index.html.

    Topics: FDIC, Community Bank, Banking industry, Bank Regulators, Commercial Banks, Regulations, Bank Regulations, FDIC Advisory Committee

    A De Novo Strategy for the FDIC: Prepaid Insurance Premiums

    Posted by Wendell Brock on Thu, Oct 01, 2009

    The ongoing wave of bank failures related to the financial crisis continues to impact the health of the FDIC's Deposit Insurance Fund (DIF). At the end of the second quarter, the DIF balance was down to $10.4 billion. Compared to a year ago, when the DIF amounted to $45.2 billion, this is a decline of some 77 percent.

    As at-risk banks continue to deteriorate, the DIF's growing loss provisions have simply outpaced accrued and collected premiums, including a special assessment that was levied on insured institutions at the end of the second quarter. Rather than demand another special assessment, the FDIC is trying a new tactic to deal with the fund's depletion: prepaid premiums.

    According to an FDIC press release, the FDIC Board "has adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012." The prepayments should generate roughly $45 billion in cash, a much-needed infusion for the anemic DIF.

    Numbers game

    Time Magazine is calling the tactic "an accounting trick," (http://www.time.com/time/business/article/0,8599,1926877,00.html?iid=tsmodule ) but FDIC Chair Sheila Bair sees it as a necessary step in the fund's restoration. The move won't impact banks' profitability, since they won't recognize the expenses any sooner under prepayment. It will impact liquidity, but the FDIC's position is that banks have sufficient cash to absorb these prepayments.

    The push for prepayments underscores the FDIC's commitment to manage through this crisis without asking the Treasury or taxpayers to foot the bill.

    Assessment increase ahead

    The aforementioned NPR also included an assessment increase of three basis points across the board, to be made effective on January 1, 2011.

    Topics: FDIC, treasury department, Bank Regulators, Bank Capital, Deposit Insurance, FDIC Insurance Fund, Bank Regulations, Deposit Insurance Fund, Bank Liquiditity, Assessment Plan

    SNL Financial's De novo Digest Article

    Posted by Wendell Brock on Tue, Sep 15, 2009

    SNL recently published an article discussing the FDIC's new policy change on de novo banks. In "Extending Bank's Adolescence," author Christina M. Mitchell writes, the "change effectively extends adolescence for young banks, lengthening the period of increased regulatory supervision required for de novo institutions in a move that industry observers say will heighten the already considerable barriers to opening new banks." Over the past few years, the regulators have nearly shut down the flow of de novo bank openings with a drastic increase in regulatory scrutiny.  As the regulatory approval timeline continues to increase, the capital requirements and start-up expenses of opening a bank have climbed significantly. These challenges are keeping many potential investors on the sidelines, and too few of them are looking for other opportunities to enter the banking industry, such as Buying a Bank

    To read Ms. Mitchell's full article click on the link: Extending Bank's Adolescence.

    Topics: Buy a bank, Banking industry, Bank Regulators, Bank Regulations, bank investors, De Novo Banks, buying a bank

    COP's August Oversight Panel Has Advice for Bank Acquirers

    Posted by Wendell Brock on Thu, Aug 27, 2009

    The Congressional Oversight Panel (COP), tasked with monitoring the Treasury's progress combating the financial crisis, has released an update on the continued risk of troubled assets in the banking industry. While the report doesn't address bank organizing groups specifically, its content does emphasize the challenges of evaluating target banks during this financial crisis.

    Those challenges include valuing the target bank's troubled assets and identifying the reasons why those assets became troubled in the first place. In the general sense of the term, troubled assets are loans or securities that no longer meet (or perhaps never did meet) acceptable underwriting standards. The credit risk on these assets exceeds acceptable levels, repayment is questionable, and the aggregate asset value is far lower than originally assumed. Troubled assets commonly include:

     Mortgage-backed securities

     Whole mortgages in the bank's portfolio

     Securities backed by credit card receivables

     Securities backed by commercial mortgages

    Community banks generally have more exposure to troubled whole mortgages.

    Underlying causes

    The bank organizing group does have a certain level of negotiating power when the target bank's balance sheet is weighted down with too many troubled assets. That's where the advantages end, however. Even before the negotiating begins, organizers must identify the underlying causes of the bad assets:

     Were these assets bad from the start, due to lax underwriting or borrower fraud? Did the bank willingly overlook missing documentation or red flags on credit histories? Was it simply an over-reliance on the assumption that collateral values would continue to rise over time?

     Or did these assets become troubled over time due to extreme weakening of collateral values or borrowers' credit qualifications?

    Procedural changes and capital requirements

    The organizing group is then tasked with devising the underwriting, workout and procedural standards that will:

     maximize the return on existing troubled assets

     add new, high quality loans to the portfolio

     minimize the addition of new troubled assets

    Obviously, these are relatively complex objectives in this economic environment. Unemployment is still rising and the outlook for property values, particularly commercial property values, remains uncertain. Excessively timid underwriting can minimize the creation of new problems, but it's counter-productive; banks have to make loans to survive. The new management team simply has to find a way to originate loans that make sense.

    Setting appropriate capital requirements is also a key step in evaluating the target bank. Ample capital can be a buffer for future loan losses, but organizers have to balance the capital needs with the availability of investor funds. Under current conditions, it is possible for organizers to meet their capital raise targets-but it isn't easy. The process takes planning, knowledge and expertise.

    Next week, we'll discuss the accounting for troubled assets, as discussed in the COP report. You can access the full COP report here: http://cop.senate.gov/documents/cop-081109-report.pdf

    Topics: Buy a bank, regulators, Bank Regulators, Loans, bank investors

    Bank Regulators Propose Liquidity Risk Managements Guidelines

    Posted by Wendell Brock on Wed, Jul 22, 2009

    Bank Regulators Solicit Comments on Proposed Liquidity Risk Managements

    The U.S. federal bank regulators (OCC, FRB, FDIC, OTS) along with the National Credit Union Association (NCUA) have collectively produced a set of guidelines regarding liquidity risk management for financial institutions. The agencies are soliciting public comments on these guidelines through September 4.

    The proposed guidelines define a framework for the identification, measurement and monitoring of funding and liquidity risk; they include specific recommendations for:

    • corporate governance
    • risk mitigation
    • management of intraday liquidity

    The responsibility of board members

    Under the proposed guidelines, an institution's board members are ultimately responsible for managing liquidity risk. The board must therefore establish an appropriate level of risk tolerance for the institution, and then communicate that risk tolerance profile to the internal management team. At least annually, the board should revisit the liquidity strategy to ensure that:

    • current liquidity risks are understood
    • the liquidity policy is still relevant and appropriate
    • the policy is being enforced
    • it is clear internally which senior managers are responsible for making liquidity risk decisions

    Key aspects of an institution's liquidity plan

    The institution's liquidity management plan should:

    • be appropriate given the complexity of the institution's structure and activities
    • identify primary funding sources, both for daily needs and seasonal or cyclical needs
    • define acceptable liquidity strategies, both for expected and unexpected business scenarios
    • address liquidity management in terms of separate currencies and/or business lines, where appropriate
    • address how the liquidity management practices dovetail with broader business strategies and contingency planning

    The plan should establish liquidity projection assumptions and a periodic review process, to ensure that those assumptions continue to be valid over time. Qualitative targets and quantitative objectives should be clearly defined. Examples include:

    • Unpledged liquid asset reserve targets
    • Funding diversification targets
    • Contingent liability exposures
    • Desired asset concentrations
    • Activity exposures
    • Targeted level of unencumbered assets to serve as liquidity cushion

    The guidelines also recommend that senior managers receive liquidity reports at least monthly, or more often when economic conditions are severe. Board members should be evaluating the institution's liquidity position at least quarterly.

    It is also advised that complex institutions make efforts to build liquidity costs into internal product pricing and performance measurement.

    Risk measurement and reporting

    Institutions are expected to measure ongoing liquidity risk with short- and long-term cash flow projections that consider both on- and off-balance sheet items. As part of this process, the institution should have measures in place to ensure the appropriate valuation of assets. Other key components of an appropriate liquidity monitoring strategy include:

    • regular stress testing
    • collateral position management
    • procedures to monitor liquidity across business lines and legal entities
    • procedures to monitor and manage intraday liquidity position

    The report also addresses liquidity risk management practices for holding companies. Read the Proposed Interagency Guidance here and (http://www.fdic.gov/news/news/press/2009/pr09107a.pdf ) let us know what you think. Are these recommended procedures detailed enough to head off unexpected liquidity crises when economic conditions sour? Have the agencies overlooked key liquidity management tactics? Or are these guidelines too much?

    Topics: Bank Regulators, Bank Regulation, Regulations, Bank Policies, Bank Regulations, Bank Liquiditity

    FDIC Proposed Policy Statement Regarding Failed Bank Acquisitions

    Posted by Wendell Brock on Thu, Jul 16, 2009

    Given the large number of bank failures over the last 18 months, the FDIC is seeing increased interest from would-be investors interested in purchasing depository assets of the failed institutions. Concern has risen at the regulatory level about whether these new bank owners and investors have the qualifications necessary to keep the acquired assets from returning to the failed assets pool. That concern has led the FDIC to issue a proposed policy statement that would, if adopted, establish a new set of qualifications for investment groups intending to purchase failed bank assets. 

    The proposed standards address the following topics:

    • Ownership structure
    • Capital levels
    • Cross guarantees
    • Affiliate transactions
    • Continuity of ownership
    • Secrecy law jurisdictions
    • Limitations on the existing owners of the failed institution
    • Disclosure requirements

    Key measures of the proposal

    1. Silo structures will not be deemed eligible for bidding.
    2. A Tier 1 leverage ratio of 15 percent is required and must be maintained for three years. After that, the institution must remain "well capitalized."
    3. The holding company must agree to sell stock or engage in capital qualifying borrowing to support the depository institution.
    4. Investors with interests in more than one FDIC-insured institution have to pledge to the FDIC their proportionate interests in each institution.
    5. Loans to investors or investors' affiliates would be prohibited.
    6. Investors would have to retain ownership in the institution for at least three years. The FDIC can approve exceptions.
    7. Ownership structures involving entities domiciled in bank secrecy jurisdictions will not be eligible bidders.
    8. Investors owning 10 percent or more of the failed institution will not be eligible bidders.
    9. Investors will have to disclose to the FDIC information pertaining to the size and composition of capital funds, the business plan, the management team, etc.

    Bidders subject to proposed rules

    Under the current proposal, these rules would only be applicable to certain types of bank acquirers, namely:

    • Private capital investors attempting to take ownership of deposit liabilities that are currently in receivership
    • De novo institutions applying for FDIC insurance in association with "the resolution of failed insurance depository institutions" 

    Balancing capital needs with prudence

    While the FDIC is conscious of the need to qualify bidders, regulators are also concerned about placing too many limitations on the inflow of new capital into the banking system. The banking system needs private investor capital. Are these proposed rules going to inhibit the flow of that new capital? Or will the new standards deliver the right amount of prudence? Feel free to sound off!

    Read the full FDIC statement here: http://www.thefederalregister.com/d.p/2009-07-09-E9-16077 The proposal policy statement is open for public comments until early-August.

    Topics: FDIC, failed banks, Buy a bank, Bank Buyers, Bank Regulators, bank investors, Bank Sales

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