Read Between the Lines

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

No New Bank Charters in 2014, M&A Picks Up

The latest Quarterly Banking Profile notes that there were no new banks chartered in 2014, for the second time in the last three years. During the year, 274 banks were absorbed by mergers and 18 others failed, leaving 6,509 FDIC-insured banks at year-end. There were 291 banks on the FDIC’s problem list with assets of $87 billion.

The FDIC’s chief economist, Richard Brown, told a Fed conference in November that there could be an increase in de novos when interest rates move up, leading to an improvement in earnings. He said there was a high correlation between new banking charters and economic variables, including the federal funds rate.

OCC Again Calls for Community Bank Stress Testing

Stress testing can help bank boards know if they have “adequate capital relative to all of its risks,” Deputy Comptroller Darrin Benhart said in a speech last month. Although stress testing is not mandated for community banks, “all banking organizations, regardless of size, should be able to analyze the potential effects of adverse events on their financial condition as part of sound risk management practices,” Benhart said. He called on community banks to use stress testing to understand risks associated with concentrations and as part of strategic planning. “The most valuable and often most difficult risk management decision is knowing when to say “no” because you have exceeded your risk limits,” he said.

Community Banks Should Not Read Welcome News in Stress Test Results 

Community banks should not be reassured by the news that the largest banks passed the Fed’s stress tests, warns Invictus Consulting Group Chairman Kamal Mustafa. Here’s why:

The Fed uses macro-economic statistics when stressing the largest banks. Those statistics don’t necessarily apply to community and regional banks, which are much more susceptible to changes in their geographical footprints. Just think of the impact that oil and gas prices are having on community banks in Texas and Oklahoma, or commodity prices on agricultural banks. The largest banks have a more diverse portfolio and limited exposure to commodities, and they can use hedging to mitigate their risks. The cost of hedging is prohibitive to community banks, leaving them far more exposed. “Community bank CEOs should wake up if they are tied to regional or microeconomic factors and not be misled by the stress testing results of the largest banks,” Mustafa says.

The fact that the banks have passed the tests is a signal that the regulators are winning the battle to manage and approve strategic plans. When stress testing first hit the scene after the recession, the largest banks fought back. “Slowly but steadily the fight has gone out of the major banks,” Mustafa says. “The battle is being won by the regulators and federal institutions. Control has been established, but the pendulum has swung too far.”

FFIEC Reveals Cybersecurity Tool in the Works

The FFIEC, representing all the prudential regulators, plans to issue a cybersecurity self-assessment tool for banks this year to help identify, mitigate and respond to cyber threats. Its priorities also include enhancing incident analysis, crisis management, training and policy development. The Information Technology Examination Handbook will also be updated. Community bank can find cybersecurity resources on the FFIEC website.

Supreme Court Ruling Could Affect Bank Guidance: Law Firm

The Supreme Court ruled earlier this month that federal administrative agencies don’t have to seek public comments when they amend interpretive rules. And that could mean that banks won’t have a say in some future guidance, suggests the White and Case law firm. The lawyers contend that the ruling could impact FAQs or regulatory guidance in the future, especially if regulators are revising or reversing interpretive rules.