Read Between the Lines 

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

Dallas Fed Paper: Are Community Banks Too Small to Succeed?

Community banks may hold the largest share of small business and agricultural loans, but they are struggling to survive in the post-recession regulatory world, according to “Too Small to Succeed?—Community Banks in a New Regulatory Environment,” a paper published by the Dallas Fed. The paper discusses the “alarming” fact that almost no new de novo charters have been issued since the recession. The paper notes that in that time period the community bank compliance burden has magnified, with lengthier Call Reports and added regulations. It cites Minneapolis Fed research that found that the  “median reduction in profitability (return on assets) for the smallest banks—those banks with assets less than $50 million—is 14 basis points if they have to increase staff by one-half of a person and 45 basis points if they increase staff by two people.”  The Dallas paper concluded that unless regulatory oversight matches the level of risk an institution poses to the entire economic system, then “more banks may become too small to succeed.”  

Worth Reading: OCC Updates Procedures on Civil Money Penalties

The average civil money penalty has increased in recent years, and directors should take note. The Office of the Comptroller of the Currency has revised its Policies and Procedures Manual that addresses these penalties, replacing a 1993 manual. The revision includes a new matrix that awards points for violations and then calculates those points into suggested fines. (No fine can exceed 1 percent of the bank’s assets). Penalties are typically imposed for misconduct and blatant disregard for safety and soundness rules and BSA/AML issues.  Remember: Directors cannot use a bank’s D&O policy to cover an individual civil money penalty; they must either pay out of pocket or purchase an individual policy that specifically covers the officer.

FDIC Outlines Cybersecurity Framework

The Federal Deposit Insurance Corp. has once again outlined the serious cyber risks facing banks, in a lengthy cybersecurity framework published in the Winter issue of Supervisory Insights. The article warns that “a bank’s board and senior management must understand the seriousness of the threat environment and create a cybersecurity culture throughout the organization.” Banks should ensure that they have cybersecurity awareness programs “across all business lines and functions,” from entry-level staff to the board.  (For more on cybersecurity, see the cybersecurity chapter in the Bank Insights 2016 Regulatory Outlook.)

M&A Applications Increasing:  Fed Data

Merger and acquisition proposals made up 23 percent of all approved Federal Reserve proposals in the first half of 2015, the Fed disclosed in its latest report on banking applications. The Fed reported that the number of approved M&A proposals increased to 136 in the first half of 2015, compared with 114 a year earlier.  Community banks with assets below $1 billion increased the number of branch applications, from 44 in the first half of 2015 compared to just 28 a year earlier.  On average, the larger community bank M&A deals ($1 billion to $10 billion in assets) took 63 days to go through the final approval process, while the smaller deals (less than $1 billion) took 59 days.

FDIC Releases New Interest Rate Risk Videos

Manage interest rate risk in a prudent manner, the FDIC has once again urged.  More balance sheets “reflect a heightened mismatch between asset and funding maturities that, coupled with tighter net interest margins, have left financial institutions more vulnerable to rising interest rates,” the FDIC said. In response, it has issued updated videos that address recent data, trends and board and management responsibilities, types of interest rate risk, risk measurement systems, modeling assumptions and other topics. The videos include a 33-minute one tailored for directors  and another series for key management and staff. 

FDIC Chairman Martin J. Gruenberg also cited interest rate risk when releasing the fourth quarter FDIC bank data.  “Banks must remain vigilant as they manage interest rate risk, credit risk, and evolving market conditions. These challenges will continue to be a focus of ongoing supervisory attention,” he said.