Read Between the Lines

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

FDIC Looking at Pre-Exam Requests

The FDIC has formed two work groups to explore ways to improve the pre-exam letters sent to community banks, Doreen R. Eberley, director of the division of risk management supervision told the FDIC Community Bank Advisory Committee at its April 2^nd meeting.  Some bankers have complained that they can’t tell how the agency is using the information that examiners are requesting.  The FDIC has also launched several studies, including one that looks at the challenges and opportunities for small, closely-held banks and one that looks at the structural profitability of community banks, with an emphasis on banks that consistently out-perform their peers and those that under-perform.

Is Your Lawyer a Deposit Broker?

The FDIC has revisited the question of whether lawyers or accountants who refer clients to your bank are deposit brokers.  If professionals refer folks to your bank informally without receiving a fee, then the deposits are not brokered, the agency now says. George French, deputy director of the division of risk management, explained to the FDIC Community Bank Advisory Committee, that the agency was referring to “programmatic or fee-based referrals,” not “informal one-offs.”  He said the FAQs issued in January did not establish new policy and were a “living document going forward.”

Small bank Holding Company Rule Includes Savings Banks

The asset threshold for small bank holding companies has been increased from $500 million to $1 billion in assets, according to the Federal Reserve’s final rule, which also applies to savings and loan holding companies. The rule allows small bank holding companies to operate with higher levels of debt, and excludes them from consolidated capital requirements.  Banks that are now considered small bank holding companies “should revisit their financial projections to consider whether introducing debt funding at the holding company can increase returns on equity without taking on unwarranted financial risk,” advises the law firm of Bryan Cave.

OCC Supports Thrift Changes without
Charter Conversion

Thrifts that want to expand their business model  would be able to do so without the burden and expense of a charter conversion under a new OCC proposal outlined by Senior Deputy Comptroller Toney Bland.  “Under our proposal, federal thrifts could retain their current governance structure without unnecessarily limiting the evolution of their business plan. As the supervisor of both national banks and federal thrifts, we are well-positioned to administer this new framework without requiring a costly and time consuming administrative process,” Bland told Congress.

Required Reading: Regulatory Capital FAQs

The prudential regulators have compiled 13 pages of frequently asked questions about the new rules for regulatory capital, based on queries from many community bankers. The questions address the definition of capital, high-volatility commercial real estate exposures, other real estate and off-balance sheet exposures, investment funds, credit valuation adjustments and other topics.

FDIC: Examiners Taking Interest Rate Risk
‘Very Seriously’

Community banks need to be prepared for a period of rising interest rates and show examiners that they are ready for different scenarios, according to George French, FDIC deputy direct of the division of risk management. He recommends that all bankers read the winter issue of Supervisory Insights,  and make sure that management and the board of directors are involved in mitigating risk.

Volcker Proposal Would Eliminate OCC, Tailor Community Bank Supervision

The Volcker Alliance, a group begun by former Federal Reserve Chairman Paul Volcker, has called for revamping the federal regulatory system that oversees the financial system in a report called “Reshaping the Financial Regulatory System, Long Delayed Now Crucial.” The report calls for a new prudential supervisory authority.  The FDIC would keep its deposit insurance function and orderly liquidity authority, while the OCC would be eliminated. Community banks would be supervised under a special division “to help ensure appropriately tailored treatment.” The report describes true community banks as those that recycle deposits in the form of loans to the community it serves.