Read Between the Lines

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

Board Input Essential to Strategic Planning

Low interest rates and diminished loan demand are prompting many community banks to revise their strategies and business models. It’s essential to make sure the board of directors is actively involved, cautions Cathy Lemieux, Executive Vice President, Supervision and Regulation, Federal Reserve Bank of Chicago, in the latest issue of the Fed’s Community Banking Connections.

She writes that there are three elements critical to good strategic planning:

• Have the “right people” and “careful execution.”
• Make sure there is expertise at the board level.
• Stick to a plan, but revise it as often as needed.

Some banks are entering niche, unfamiliar markets, such as energy, health care and equipment financing, she writes. Commercial real estate is also becoming competitive again, especially in multi-family properties, though there is competition from larger banks and investors. That may prompt some community banks to loosen underwriting standards.

Hoenig: Community Banks Smothering Under Regs

Federal Deposit Insurance Corp. Vice Chair Thomas M. Hoenig told the Boston Economic Club in a speech earlier this month that the Dodd-Frank law would not stop government bailouts. That’s because “firms remain too large, too leveraged, too complicated, and too interconnected to be placed into bankruptcy when they fail,” he said.

“In the meantime, regional and community banks are smothering under layers of new regulations even though they are not too big to fail, and even though they hold significantly higher levels of capital than the largest banking and financial firms.”

Community Banks Could Be Next Cyber Targets

Don’t assume that hackers won’t attack a community bank. That’s the message from Comptroller of the Currency Thomas J. Curry in a May 16 speech. “And while the largest institutions might be the most tempting targets for the bad guys, what we’ve learned from other sectors and are now seeing in the financial sector is that as the larger financial institutions improve their defenses, hackers are likely to direct more of their attention to community banks,” he said.

The Federal Financial Institutions Examination Council, which includes all the banking regulators, last year formed a Cybersecurity and Critical Working Group. They have plans to “more aggressively supervise smaller, community banks with cybersecurity vulnerability and risk-mitigation assessments,” according to Phoenix attorney Richard H. Herold of Snell & Willmer.

Curry Calls For Real Joint Exams from State Regulators

As a result of the financial crisis, state and federal regulators need to “step up our game,” Comptroller Curry told the Conference of State Bank Supervisors in Chicago. Many of the failed community banks operated with flawed business plans, inadequate capital and excessive real estate concentrations, he noted. He urged state regulators not to simply put a department’s name to a report. “A joint bank examination needs to be a joint product,” he said.

Russell Index Recalculation Could Hurt Capital Raising

Some public banks in the Russell 1000, 2000 and 3000 indexes may drop to a lower tier or out of the indexes entirely after recalibration at the end of this month. Invictus estimates that be as many as 270 banks affected, including 38 that could drop out altogether. This is likely to hurt the banks’ stock prices. Many institutional investors and index fund managers may be forced to reduce allocations or drop the stocks entirely due to investment criteria restrictions.

The end result of a downgrade can be that acquisitive banks have a less valuable acquisition currency and/or will have to tolerate more dilution of existing shareholders during any future fundraising.​