THE CEO CORNER – Despite Political Talk, Regulatory Capital Focus to Continue

Community and regional bank executives along with their board members should not be lulled into a false sense of security based on recent political changes in the nation’s capital. Especially when it comes to bank capital.

Although it is safe to say that Congress will consider some modifications to the Dodd-Frank Act, it is safer to say that bank capital will continue to be paramount to legislators and more importantly, bank regulators. Indeed, the Office of the Controller of the Currency’s semi-annual risk perspective, published last month, emphasizes that examiners will focus on community banks’ capital planning processes in the coming year.

Let’s review some recent events that demonstrate why bank capital has been and will continue to be sacred:

• Falling oil prices and their effect on bank energy portfolios.
• Lower grain prices’ impact on return-per-acre calculations for agricultural bank loans.
• New Basel III liquidity requirements and their trickle-down effect on smaller banks.
• Global monetary action, such as The Swiss National Bank’s uncapping the franc from the euro, which led to an international currency valuation cascade with potential ramifications on both the U.S. dollar and the economy.

Focusing on the domestic side of the equation, consider the inevitable shift in bank interest rates and its impact on interest rate risk. There’s a potential for a drop in production due to a falling demand in exports caused by a stronger dollar, which could weaken economic recovery. Companies may see higher operating expenses driven by health care costs, regulatory expenses and the threat of a higher minimum wage and paid sick time. All of these concerns place banks and their customers at risk.

It should be evident that that these issues can—and will—put pressure on bank lending portfolios. How we in banking survive and grow in this ever-changing global environment, with all of its volatility, is as much about capital strength as any other singular component of our industry. Bank executives and their boards must continue to be laser-focused on their capital and the impact their strategic plan has on that capital. Let’s not be fooled, capital still rules the day!   

ABOUT THE EXPERT

During his 30-year financial services career, Vito Nardelli has excelled at building and maintaining excellent relationships with regulators.  He served as the President and COO of OceanFirst Financial Corp. and as President of OceanFirst Bank in New Jersey.  Previously, Mr. Nardelli served as the Senior Vice President and Retail Banking Director for Trust Company Bank, and held several leadership positions at First Union National Bank, including president of the Central New Jersey region.  He has also served as Executive Director of the New Jersey Economic Development Authority in the 1990s, and was a Lieutenant Colonel in the United States Air Force Reserve.  He received his BS and JD degrees from Fordham University and has an MBA in Executive Management from St. John’s University.