Read Between the Lines

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

Fed Reiterates Importance of Capital Planning

The Federal Reserve Bank of Atlanta has taken another look at why so many banks failed in Georgia and Florida during the crisis. One takeaway: “It is critically important for banks to engage in ongoing capital planning,” writes Michael Johnson, senior vice president, in Community Banking Connections. Johnson says that the key to avoiding bank failures in the future is for banks to implement “a sound, sustainable strategy and risk management practices.”

FDIC Expands Definition of Brokered Deposits

Be sure to review the Federal Deposit Insurance Corp.’s recent updated guidance on brokered deposits, which appears to have broadened the definition of brokered deposits, while narrowing when banks can obtain relief from accepting them.  Undercapitalized banks are prohibited from accepting brokered deposits, and significant brokered deposits can increase a bank’s insurance assessment. Bank lawyers say that banks with higher levels of brokered deposits often receive extra regulatory attention, such as mandates that they draft a liquidity plan to show how the bank would replace the brokered funds.

Interest Rate Risk Remains Top Focus

After analyzing interest rate risk modeling at more than 1,500 community and mid-size banks, the OCC is reminding banks that they need to perform sensitivity analysis of Non-Maturity Deposit assumptions. “Testing the sensitivity of existing assumptions by applying subtle or significant variations to the repricing or decay rates may be used to analyze the potential impact on capital and earnings if depositors are less stable, or more price sensitive, than expected,” the OCC  writes in the fall semi-annual risk perspective.  “As appropriate, strategic planning should include consideration of potential asset-liability management strategies to minimize earnings volatility and capital exposure under different rate scenarios.”

The FDIC’s Winter issue of Supervisory Insights also focuses on interest rate risk, noting that exposure to changing interest rates is a risk faced by every community bank.  (The February issue of Bank Insights will address this in more detail).

New York State to Require Cybersecurity Exams

New York’s Department of Financial Services announced last month that all banks licensed in the state would now undergo cybersecurity exams. Regulators want to make sure that banks are incorporating cybersecurity into their corporate governance structures. Examiners will ask banks about resources devoted to cybersecurity issues and risk management,  protections, testing, incident detection, management of third-parties and whether the bank has cybersecurity insurance coverage.  Treasury Deputy Secretary Sarah Bloom Raskin, a former state banking regulator and Fed member, also advised bank executives and directors in Texas last month to consider purchasing cyber risk insurance. Qualifying for insurance can help banks assess their risk levels and identify tools and best practices the bank might be lacking.

OCC Encourages Community Bank Collaboration

The OCC says in a new paper that community banks might want to pool or share resources to reduce costs and leverage expertise.

Worth reading: Updated Handbooks

The OCC has updated four handbooks that apply to community banks. One is on government securities; another is about litigation and legal matters; a third is about conflicts of interest, and the fourth is about retail nondepost investment products.

Want to Buy a Troubled Bank?

The FDIC has created a new webpage to make it easier for healthy banks to bid on failing banks. The page includes FAQs, information about the marketing process, regulatory guidance, application links and even a video about loss sharing. The page allows bidders to update their profiles by including what state and asset size preference they want to buy.     <