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The FDIC Can Now Resolve Any Size Bank Failure

Posted by Wendell Brock on Mon, Sep 27, 2010

The latest words from FDIC Chairman Bair on the implementation of the Dodd-Frank Act…

With the enactment of the Dodd-Frank Act on July 21st of this year, the FDIC was given the tools to resolve a failing financial company that poses a significant risk to the financial stability of the United States. We now have the framework in place to resolve any financial institution, no matter how large or complex. Implementation of Dodd-Frank is designed to end "too big to fail," and the new resolution authority is a major reason why it will do so. The orderly liquidation process established under Title II of the Dodd-Frank Act imposes the losses on shareholders and creditors, while also protecting the economy and taxpayer interests.

If appointed as receiver for a failing systemic financial company, the FDIC has broad authority under the Dodd-Frank Act to operate or liquidate the business, sell the assets, and resolve the liabilities of the company immediately after its appointment as receiver or as soon as conditions make this appropriate. This authority will enable the FDIC to act immediately to sell assets of the company to another entity or, if that is not possible, to create a bridge financial company to maintain critical functions as the entity is wound down. In receiverships of insured depository institutions, the ability to act quickly and decisively has been found to reduce losses to creditors while maintaining key banking services for depositors and businesses. The FDIC will similarly be able to act quickly in resolving non-bank financial companies under the Dodd-Frank Act.

This is a major new responsibility for the FDIC. As you know, on August 10th we created the new Office of Complex Financial Institutions to help ensure that we are always ready to meet this responsibility.

The Notice of Proposed Rulemaking is one step forward in this process. The proposed rule is intended to provide greater clarity and certainty about how certain key components of the resolution authority will be implemented and to ensure that the liquidation process under Title II reflects the Dodd Frank Act’s mandate of transparency. With the US financial system now stable and healing, it is important to move ahead with rules to make clear how the orderly liquidation process would be implemented to restore greater market discipline and promote clear understanding among shareholders and unsecured creditors that they, not taxpayers, are at risk.

The FDIC is consulting with the Financial Stability Oversight Council members in accordance with the Dodd-Frank Act. In order to provide some additional time for Council members to offer their views and allow further consultation, today's meeting will provide a briefing for the Board members. We plan to ask for a notational vote next week after the FSOC has had its first meeting.

A special issue of concern during consideration of Dodd-Frank was how the FDIC might use its authority in a liquidation to pay certain creditors of a receivership more than similarly situated creditors if certain criteria are met. This proposal re-affirms that all equity share holders and unsecured creditors are at risk for loss and that the general rule will be that their claims will be processed in accordance with the priorities established under the bankruptcy code which are the same priorities that we use in our bank receiverships. The authority to differentiate among creditors will be used rarely and only where such additional payments are "essential to the implementation of the receivership or any bridge financial company." This cannot be a bail-out – that is clear from the statute. The NPR proposes to confirm that long-term bondholders, subordinated debt holders, and shareholders of a financial company will in no circumstances receive payments above their share to which they are entitled under the priority of payments in the statute. They can never be "essential" to the receivership or the bridge. This is consistent with the clear intent of the statute and we believe it is important that creditors have clarity in their treatment in a future liquidation. This is also consistent with the approach we have taken in our receivership process for banks. We have authority now to differentiate among creditors where it will maximize recoveries and have never found the need to use it except to compensate employees and other general creditors necessary to maintain essential operations.

The other issues addressed by the NPR will, likewise, clarify how we will apply the liquidation authority in key, discrete areas – and provide important clarity to the markets.

Equally important parts of the publication of the proposed rule are the background description of the orderly liquidation authority and the series of questions on which we are seeking comment for 90 days.

The background information provided in the NPR gives an overview of the powers and different options that the FDIC may use in liquidating a large, complex non-bank financial company. We think this will be helpful to market participants who are less experienced with the bank closing process on which the liquidation authority is modeled.

We look forward to comments on the broader questions posed in the NPR. Given the importance of the new liquidation authority – and the need for clarity in how it could be applied – the responses to the questions posed will inform a future, broader regulation to be proposed early next year to define key issues in the liquidation of large, complex financial institutions.

As part of our public rulemaking, this NPR will facilitate communication between the FDIC and the financial services industry, as well as the general public, on implementing the new resolution authority. I look forward to the comments.

Topics: Bank, FDIC, regulators, Too-Big-To Fail

Bank Regulation Increases Under the HIRE Act

Posted by Wendell Brock on Thu, Aug 19, 2010

Many Bank’s don’t realize that the HIRE Act, signed into law in March, which was sold to promote jobs, also has implications for the banking industry. Namely, the offset provisions impose withholding and reporting requirements to expand offshore tax compliance by non US banks, thereby funding the cost of the act.

 

Tax penalty for failure to report

 

Under the new legislation, foreign financial institutions must enter into a reporting arrangement with the IRS to provide account information on U.S.-owned accounts. Institutions that refuse such an arrangement are subject to a 30% tax on any payment of interest, dividends, rents, salaries, gains, profits and other forms of income from U.S. sources. Excluded from this definition of “withholdable payments” are payments owned by publicly traded companies or businesses wholly owned by U.S. residents.   

 

An institution may obtain a waiver of withholding by certifying to the withholding agent that it has no substantial U.S. account owners. However, withholding agents are liable for the tax and are still required to collect it if they have any reason to believe such certification is false.

 

Terms of reporting arrangement

 

The accepted reporting arrangement defined in the act requires foreign financial institutions to provide the IRS with the following information for each U.S.-owned account:

 

  1. Name, address and TIN of each account holder
  2. If the account holder is a U.S.-owned foreign entity, the name, address and TIN of each substantial U.S. owner of that entity
  3. Account number
  4. Account balance
  5. Gross receipts and gross withdrawals from the account

 

With respect to Number 2 above, a substantial U.S. owner is: any U.S. individual who owns 10 percent or more of the stock of a foreign corporation; any U.S. individual who owns more than 10 percent of the profit or capital interests in a foreign partnership; or any U.S. individual who owns more than 10 percent of the beneficial interests of a foreign trust.

 

The institution does have the option to exclude reporting on individually owned accounts where the account holder has less than $50,000 in aggregate balances at that institution.

 

Individual reporting requirements

 

The legislation also requires individuals to comply with the new reporting regime. Individuals who own certain foreign financial assets worth more than $50,000 in aggregate must include the information listed above in their personal tax returns. Foreign financial assets are defined as financial accounts, as well as stocks or securities issued by a non-U.S. person, financial instruments or contracts issued by or counterparty to a non-U.S. person, or any interest in a foreign entity.  The IRS wants to know where US citizens are keeping their money and how much.

 

Basically, banks will chose to not to bear the risk being liable for the tax and withhold the 30 percent on all wire transfers/payments to offshore bank accounts and businesses that have not made the disclosure agreement with the IRS. If the bank makes the wire transfer and should have withheld the 30 percent but did not – they are liable to pay the 30 percent tax to the IRS.  If the bank makes the wire transfer, and should NOT have withheld the 30 percent, then it is the individual’s responsibility to collect the tax from the IRS, there is no liability on the bank for the mistake.

 

The HIRE Act’s reporting and withholding requirements apply to payments made after December 31, 2012. 

Topics: Bank, Banking, Bank Risks, regulators, tax laws, Banking industry

FDIC Chairman Speaks...

Posted by Wendell Brock on Thu, Jul 15, 2010

FDIC Chairman Sheila C. Bair said, "Today represents a significant milestone in the history of financial regulation in the United States. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, a meaningful framework is now in place that addresses many of the weaknesses in our financial system that led to the financial crisis.

From the outset of this process, the FDIC has pushed for a credible resolution mechanism that provides the authority to liquidate large and complex financial institutions in an orderly way. The legislation will enforce market discipline by making clear that shareholders and creditors bear the losses for the risks they take. It also will protect taxpayers by empowering the government with the means to end Too-Big-to-Fail and providing substantial new protection to consumers and the financial system.

The responsibility now shifts to regulators to implement this law in a manner that is aligned with its principles. To this end, the FDIC will move swiftly and deliberately through the various rulemakings and studies required under the bill. We will do so in an open, transparent and collaborative fashion. In addition to a dedicated webpage where the public can track key steps in the implementation process, we will also release the names and affiliations of outside individuals and groups that meet with FDIC officials about the bill. We will webcast open Board meetings on implementation issues and provide ready access to comments received for all rulemakings.

As I have often discussed, my vision for financial reform encompasses three key pillars: resolution authority, systemic oversight and consumer protection. On resolution authority, the new law will give the FDIC broad authority to use receivership powers, similar to those used for insured banks, to close and liquidate systemic firms in an orderly manner. On systemic oversight, it creates a Systemic Risk Council — a concept originally advanced by the FDIC — to provide a macro view to identify and address emerging systemic risks and close the gaps in our financial supervisory system. Regulators will also be empowered to provide much-needed oversight to derivatives markets. On consumer protection, the creation of the Consumer Financial Protection Bureau will put a new focus on the unregulated shadow financial sector by setting and maintaining strong, uniform consumer protection rules for both banks and non-bank financial firms.

I am also very pleased that the bill will strengthen the capital requirements of the U.S. banking system. For the first time, bank holding companies will be subject to the same standards as insured banks for Tier 1 capital. Excess leverage and thin capital cushions were primary drivers of the financial crisis, which resulted in severe, sudden contractions in credit and led to the loss of millions of jobs. This provision will bring stability to the financial system, allowing it to support real, sustainable, long-term growth in the real economy. Senator Susan Collins was the sponsor of this key provision, and I commend her efforts in this area.

I would also highlight the new backup authority the FDIC will have over bank holding companies, which will augment our current backup authority for insured institutions. The legislation also will improve our ability to manage our deposit insurance fund and build stronger reserves.

As I have often noted, no set of laws, no matter how enlightened, can forestall the emergence of a new financial crisis somewhere down the road. It is part of the nature of financial markets. However, what this law will do is help limit the incentive and ability for financial institutions to take risks that put our economy at risk, it will bring market discipline back to investing, and it will give regulators the tools to contain the fallout from financial failures so that we will never have to resort to a taxpayer bailout again.

I commend Chairman Dodd and Chairman Frank for their committed leadership in navigating this bill through the legislative process and look forward to the hard work ahead to implement the law."

Now there will be more regulation to absorb and implement increasing the cost to do business.  We are interested in your comments about this legislation...

Topics: FDIC, regulators, Commercial Banks, Credit, Deposit Insurance Fund, Consumer Confidence

Loan Portfolio Regulatory Requirements - Intense Portfolio Analytics

Posted by Wendell Brock on Fri, Apr 23, 2010

As the financial crisis deepened, regulatory requirements for financial institution's loan portfolios, both banks and credit unions, are much more stringent.  The thought is that institutions can no longer book loans and forget about them; they must go back regularly and revisit the value of the asset backing the loan and the credit worthiness of the borrower as well as other items that may change.  Considering the national financial crisis, many people have experienced changes in their personal and business finances.

As financial institutions prepare for or respond to an examination, questions around the loan portfolio are asked: what are the examiners asking for? How deep do they want the bankers to drill to find issues with the loan portfolio? What kind of data do they want from the institution? You may say, "but my institution is clean with very few problem loans, I won't need to do any of this research" - think again. They are also looking for loans that could go bad or the data to defend a clean portfolio.

Below are a few items taken from a regulatory agreement between a financial institution and their regulator, these are by no means comprehensive, nor are they the same for each regulatory agency, but each is similar in their requests:

"The Board shall develop, implement, and thereafter direct the Bank's management to ensure the Bank's adherence to systems which provide for effective monitoring of:  

(a) early problem loan identification to assure the timely identification and rating of loans and leases based on lending officer submissions;

(b) statistical records that will serve as a basis for identifying sources of problem loans and leases by industry, size, collateral, division, group, indirect dealer, and individual lending officer;

(c) adequacy of credit and collateral documentation"

The regulators are asking for probable loss modeling of the loan portfolio, which loans are likely to go bad based on objective statistical data. Along with stratification analysis based on loan officer, industry, size, collateral, division, group, indirect dealer; additionally the institution may need to show the stratification of loan grading, FICO scores, FICO migration, zip code, branch office, loan size, or any other important data point. The institution should know its loan migration, how many "A" grade loans in a portfolio have shifted over time to "B" or "C" or lower grade loans.

They also want the assets backing the loans reanalyzed to make sure there is still enough value behind the loan if a foreclosure or repossession is necessary. Real-time asset valuations combined with stress testing the portfolio will be the key; how does the financial institution get objective real-time values on the assets that back a diverse loan portfolio that includes consumer, residential and commercial real estate for thousands of loans? 

The Agreement goes on to state that the financial institution will...

"The Board shall within sixty (60) days employ or designate a sufficiently experienced and qualified person(s) or firm to ensure the timely and independent identification of problem loans and leases.

"The Board shall within sixty (60) days ensure that the Bank's management is accurately analyzing and categorizing the Bank's problem loans and leases.

"The Board shall establish an effective, independent and on-going loan review system to review, at least semi-annually, the Bank's loan and lease portfolios to assure the timely identification and categorization of problem credits. The system shall provide for a written report to be filed with the Board after each review and shall use a loan and lease grading system consistent with the guidelines set forth in "Rating Credit Risk" and "Allowance for Loan and Lease Losses" booklets of the Comptroller's Handbook. Such reports shall include, at a minimum, conclusions regarding:

(a) the overall quality of the loan and lease portfolios;

(b) the identification, type, rating, and amount of problem loans and leases;

(c) the identification and amount of delinquent loans and leases;

(d) credit and collateral documentation exceptions;

(e) the identification and status of credit related violations of law, rule or regulation;

(f) the identity of the loan officer who originated each loan;

(g) loans and leases to executive officers, directors, principal shareholders (and their related interests) of the Bank; and,

"The Board shall ensure that the Bank has processes, personnel, and control systems to ensure implementation of and adherence to the program developed pursuant to this Article.

In addition to the above requirements, this will require stress testing of the portfolio across several data points including, loan to value compression, FICO score movement, as well as interest rate adjustments. How will each type of loan portfolio respond to multiple, simultaneous stresses?

The board of directors has a lot of work to do in assisting the management team of the institution. The regulators are asking for more involvement with the institution and its problem loans requiring, objective defensible grading and stratification analysis, along with probable loss modeling, stress test simulations, and real-time asset valuation, of 100 percent of the portfolio. Moreover, if you think that your institution is completely clean - you are not on a problem list or don't have very many problem loans - well now you will have to prove it to the regulators.

Real, defensible, comprehensive portfolio analytics will be the solution - it will take a banker/CFO weeks or months to develop such a custom model for your institution in an excel spreadsheet. Or will it require anew strategy?

Topics: Interest Rates, regulators, stress tests, Regulations, Loan Grading, Asset Valuation, Stress Test Simulation, Portfolio Analytics, loan portfolio

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

Safest Deposits in the World

Posted by Wendell Brock on Fri, Nov 20, 2009

As bank failures mount into a heap of moldering economic stimulus, and the FDIC's Bank Insurance Fund shrinks to its lowest level in many years, FDIC Chairman Sheila Bair tells the public that depositor have nothing to worry about, because, "The FDIC fully guarantees their insured deposits and provides them with seamless access to their money. For the insured depositor, a bank failure is a non-event."

This may be true for many depositors, however it is not true for the bank's "C" level management team, board of directors, and shareholders - they are the losers! In more ways than one! Not only do they lose their bank, but they lose their jobs, careers, and opportunity to associate with a bank in the future. With the FDIC there is no forgiveness, no bankruptcy court to "work out" the problems and reorganize the institution - the only option is failure.

The FDIC has a $100 billion line of credit with the U.S. Treasury - they can close a lot of banks with that much money. So far, all the banks that have been closed, the expense has been paid for by the FDIC's Member Banks through their deposit insurance premiums they have paid in over the years. We can only hope, the FDIC won't have to tap that line of credit. The law states that the FDIC guarantees deposits with the full faith and credit of the U.S. Government, which means borrowing from the U.S. taxpayers. We are the full faith and credit of the U.S. Government.

In most cases when a bank is closed the deposits are available the next business day. This is because the FDIC is usually available to help another institution acquire the deposits and make good on them. Often the FDIC has to give a lot of concessions to the acquiring bank - which costs the insurance fund money. The complexity of these transactions, even for a small bank, takes many hours to iron out - often taking upwards of ninety people from the FDIC two weeks to close a bank.

The amazing thing is that with all the flaws of the system, it seems to work - no FDIC insured depositor one has ever "lost a penny of their deposits" according to Ms. Bair, "and none ever will". Thank goodness for the full faith and credit of the U.S. Government.

Topics: FDIC, Bank Failure, failed banks, regulators, Deposit Insurance Fund

Supervisory Changes for De Novo Banks

Posted by Wendell Brock on Fri, Sep 11, 2009

The FDIC has announced its intention to extend the de novo period for certain new banking institutions. The previous de novo period was three years; the new one will be seven years. This change is significant because newly insured institutions are subject to more scrutiny and higher minimum capital ratios during that de novo period. Along with extending the de novo period, the FDIC will also subject de novos to more risk management examinations and require prior approval for any de novo business plan changes.

Heightened risk for seven years

Regulators say the supervisory updates are needed because de novos pose a heightened risk to the banking system. According to the FDIC, too many of the actual failures that occurred in 2008 and 2009 were banks that had been open for fewer than seven years. On top of that, a good number of those failures were banks that had been operating between four and seven years-banks that, under current policy, were not subject to the heightened de novo regulations.

According to data compiled by FinCriAdvisor (http://www.fincriadvisor.com/2009-09-07/FDICdenovopolicy), twenty-three, or 19.6 percent, of the 109 bank failures occurring between January 1, 2008 and August 21, 2009 were de novos. Of those twenty-three, six were within the three-year de novo period; the rest, 74 percent, failed between their fourth and seventh years of operation.

Exceptions

The extended de novo period will apply to existing newly insured institutions as well as banks for which charters have not yet been issued. Since the number of new charters awarded by the FDIC in recent months is relatively minimal, the changes affect existing banks far more than would-be banks. The only de novos that won't be subject to the extension and heightened scrutiny are those that are subsidiaries of eligible holding companies.

Eligible holding companies must have consolidated assets of $150 million or more. Bank holding companies are required to have BOPEC ratings of at least 2; thrift holding companies must have an A rating.

Details

Capital requirement.

A primary change implied by the extension of the de novo period is an increased capital requirement. De novos are currently required to maintain a Tier 1 leverage ratio of at least 8 percent during the de novo period. A longer de novo period means that young institutions will have to maintain this higher ratio for seven years instead of three.

Examination frequency

. Along with extending the de novo period, the FDIC will also increase the frequency of risk management exams for de novo banks. Periodic risk management exams, which begin after the institution's first birthday, will occur once annually rather than once every eighteen months. De novos will have to budget for the extra costs associated with the additional examinations.

The first year examination requirements for de novos will be as follows:

  • Limited risk management exam during first six months of operation
  • Full risk management exam during first twelve months of operation
  • Compliance exams during first twelve months of operation
  • CRA evaluation during first twelve months of operation

Thereafter, under the new policy, a risk management exam will be conducted every twelve months until the expiration of the de novo period. Compliance exams and CRA evaluations "will alternate on an annual basis."

Business plan changes

. The new policy also requires de novos to get FDIC approval prior to implementing any material changes to the institution's business plan during the seven-year de novo period. Previously, newly insured institutions had to provide the FDIC with a written notice of proposed business plan changes within the three-year de novo period.

The FDIC argues that experience shows the necessity of this requirement; when newly insured institutions deviate from their original business plans, those deviations can often lead them into areas of business where they do not have adequate risk management expertise or resources. "Significant deviations from approved business plans" was one of several common elements the FDIC identified among troubled institutions that have not yet completed their seventh year of operation.

Change requests will be reviewed to ensure that:

  • There is a defensible business reason for the change.
  • The de novo has the resources-financial and human-to manage any risks created by the change.

While this requirement keeps de novos from jumping into risky lines of business without adequate forethought, it also limits the de novo's ability to adapt quickly to changing circumstances. Should the bank implement changes or deviate from the original business plan without FDIC approval, fines or other penalties could result.

Financial statement updates

. In the third year of operation, de novos must now provide the FDIC with current financial statements along with strategic plans and projected financial statements covering years four through seven. This applies to existing institutions that are less than three years old, as well as newly chartered institutions. The FDIC will want to know specifically about the de novo's expansion plans, product/service strategies and the outlook for capital expenditures and dividend payments.

To read the full Financial Institution Letter explaining and defending the altered supervisory procedures, click here: http://www.fdic.gov/news/news/financial/2009/fil09050.html

Topics: FDIC, regulators, Bank Capital, Bank Regulations, tier 1 capital, De Novo Banks, De Novo Banking

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

Administration to Consider A One-regulator System for Banking Industry

Posted by Wendell Brock on Thu, Jun 04, 2009

The Wall Street Journal has reported that the Obama administration will recommend an overhaul of the current bank regulatory system to replace several regulators with one super-agency. The plan is said to involve the creation of a systemic regulator and a new consumer protection agency as well.

Currently, banks can be chartered as national banks, state banks, federal savings banks or state savings associations. Each type of charter involves a different set of regulators. For example, national banks are regulated by the Office of the Comptroller of the Currency or OCC. Federal savings banks, however, are regulated by the Office of Thrift Supervision or OTS. State banks can be jointly regulated by the state and either the FDIC or the Federal Reserve Board (FRB). State-chartered thrift holding companies and state savings associations, however, are regulated by the state and OTS. The bank’s organization group selects the type of charter and chartering group within its bank application during the formation process.

Competing agencies create gaps and leniencies

Critics of the current system argue that this regulator mélange lacks comprehensive, systemic oversight and creates regulatory gaps that have been exploited by financial companies.

Also at issue is whether the current system sufficiently motivates regulators to provide careful oversight. New banks represent new funding for regulators; since bank organizers tend to gravitate towards the regulator of least resistance, regulators actually benefit on some level from offering greater leniency.

A systemic regulator would eliminate this competition for leniency. The agency would be tasked with identifying and addressing regulatory gaps in areas such as mortgage banking, hedge funds, credit default swaps and other specialty financial products. As well, the entity would be responsible for recognizing risks and problems within financial companies that are heavily entrenched in the industry—to properly manage or even avoid failures of Lehman’s magnitude.  

ABA warns of ending dual-bank system


A single-agency system would require the unification of oversight functions currently managed by the OCC, OTS, FDIC and FRB. In a letter written to Treasury Secretary Timothy Geithner, ABA President and CEO Edward Yingling expressed the banking industry’s opposition to this concept. According to Yingling, such a system would favor federal banks over state banks, and eventually lead to the end of the dual banking system. The dual banking system, says Yingling, isn’t the enemy; it creates competition and stimulates innovation in financial products and evolution of regulatory systems.

Yingling also argues that the proposed model is based on the U.K.’s Financial Services Authority, which was not able to avert that country’s financial crisis.

The single regulator concept is still just a subject of debate on Capitol Hill. Senator Christopher J. Dodd and Representative Barney Frank have both spoken out against the idea. Press reports indicate that the administration will publicize a proposal later this month.

Topics: FDIC, regulators, Banking industry, OCC, OTS, FRB, super-agency

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