Read Between the Lines

Each month Bank Insights reviews news from regulators and others to give perspective on regulatory challenges.

Fed to Disclose Bank Application Details

The Federal Reserve will start publishing a semi-annual report with statistics on how long it takes to process acquisition and expansion applications, the number of approvals, denials, and withdrawals – and the primary reasons for withdrawals. The first report will be released in the second half of this year, and include filings from January through June.

A careful reading of SR Letter 14-2 offers clues about what it takes to win approval. Here are some highlights:

• Banks in in “less-than-satisfactory condition” – usually a CAMELS rating of 3 or worse — usually don’t win approval. A 3 in risk management or capital can doom a bank’s chance to expand. An overall rating of 3 usually means it will be hard to get approval for an acquisition unless the bank can prove to the Fed that the move would “strengthen the organization.”
• Experience matters, especially on bank boards. The Fed will review the background, finances and professional expertise of officers, directors and shareholders when looking at applications. Proposed directors or managers with insufficient banking experience can kill a deal. Someone who has worked at an investment bank may not be right for a community bank, the Fed says. The Fed also is also wary of those officers who were “associated” with troubled banks or ones that failed.
• Banks’ business plans must make sense. The Fed has problems with overly aggressive plans, ones that would lead to concentrations of assets, or those that don’t address known deficiencies or risks.

FDIC’s Gruenberg on Consolidation

While the community bank market is consolidating, the good news is that community banks are often those doing the acquiring. That’s the takeaway from FDIC Chair Martin J. Gruenberg’s videotaped remarks to the ICBA’s national convention.  An upcoming FDIC analysis will show that about two-thirds of the community banks that merged between 2002 and 2012 were acquired by another community bank. Most of the consolidation has been concentrated in banks with less than $100 million in assets, and 85 percent of those banks were acquired by other community banks.

OCC: Stress Testing is ‘Fundamental Tool’

Risk management is essential in distinguishing the winners and losers in the banking market, according to Comptroller of the Currency Thomas J. Curry. He encouraged community banks to use stress testing tools to analyze commercial real estate, agriculture and other loan portfolios. In virtual remarks to the ICBA, Curry said stress testing tools help community banks understand how their portfolios will perform under different economic conditions. “I can’t think of a more fundamental risk management practice than subjecting your credit book to rigorous testing,” he said.

Interest Rate Risk Worries Examiners

The latest FDIC quarterly report shows the impact of rising longer-term rates on unrealized gains on available-for-sale securities. Banks reported $9 billion in unrealized losses on their available-for-sale securities. “Interest rate risk is an ongoing concern for bank regulators. And it will continue to be a focus of attention in our safety and soundness examinations,” said FDIC Chairman Gruenberg. Community banks are seeking higher asset returns by going out further on the yield curve, leaving them vulnerable to interest rate risk.

CFPB Wants to Work with State Banking Regulators, AGs

The Consumer Financial Protection Bureau is already working with banking regulators in 14 states to share consumer complaints it receives on a real-time basis. CFPB Director Richard Cordray told the National Association of Attorneys General that every state AG’s office should also partner with the bureau. He pointed out that the CFPB has “the ability to write new rules that create substantive law governing the operations of consumer financial markets. It is striking to me just how extensively the experience and perspective of attorneys general have been and will be informing these initiatives.”