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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 Internal audits are conducted by just a few people, typically, they are reactionary, and they utilize outdated technology, if any technology at all.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

The FDIC Deposit Insurance Fund

Posted by Wendell Brock on Tue, Apr 07, 2009

With the Deposit Insurance Fund (DIF) reserve ratio at its lowest point since June of 1994, the FDIC is currently moving forward on the Restoration Plan that was announced last year. The plan seeks to restore the reserve ratio to the required amount of 1.15 percent within five years; as of September 30, the reserve ratio was 0.76 percent, down from 1.01 percent three months prior.

The Plan involves overhauling the assessment system so that the riskier financial institutions will bear a greater burden in restoring the DIF balance and reserve ratio. As an immediate measure to increase the fund, the FDIC did initiate a 7-basis-point increase to its assessment rates across the board. This change, which created an assessment range of 12 to 50 basis points, was effective only for the first quarter of 2009. The proposed changes for the second quarter are geared towards implementing assessment-pricing calculations that weight an institution’s risk profile appropriately.   

Second quarter brings more robust pricing formulas

The proposed base assessment rate ranges from 10 to 45 basis points. Risk Category I institutions would begin with an initial assessment rate of 10 to 14 basis points; the corresponding assessment rates for Risk Categories II, III, and IV would be 20, 30, and 45 basis points, respectively. Further adjustments would be made to account for the institutions’ unsecured debt, secured liabilities and brokered deposits. The resulting total assessment ranges in basis points by risk category are:

•  I: 8-21
•  II: 18-40
•  III: 28-55
•  IV: 43-77.5

Some points to note regarding the proposed changes to the pricing calculations include:

•  CAMELS component ratings and financial ratios will still be used to determine assessment rates for most institutions. 
•  An additional ratio will be added to increase the assessment rate for institutions that experience rapid asset growth funded by brokered deposits.
•  The pricing calculation used for large Risk Category I institutions will consider the assessment rate from the financial ratios method and other information, in addition to the bank’s weighted-average CAMELS component rating and long-term issuer rating.
•  The FDIC may increase the assessment rate by up to 10 basis points on Risk Category II, III, and IV institutions, when the institution’s ratio of brokered deposits to domestic deposits exceeds 10 percent.
•  Institutions in any category that rely heavily on secured liabilities, such as Federal Home Loan Bank advances, will face an increased assessment rate.
•  Institutions that carry long-term unsecured debt may have their assessment rate reduced as a result.

Bleak outlook

Under this plan, the FDIC expects 2009 assessments to increase to $10 billion, from $3 billion in 2008. The agency had previously estimated bank failure costs of about $40 billion through 2013, but because the economy has worsened since last fall, this estimate is now believed to be too low.

Topics: FDIC, Restoration Plan, Assessment Plan, changes

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BankNotes© is published by De Novo Strategy as a service to clients and other friends. The information contained in this publication should not be construed as legal, accounting, or investment advice. Should further analysis or explanation of the subject matter be required, please contact De Novo Strategy at