Read Between the Lines

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

Study: Compliance Spending Doesn’t Lead to Better Ratings

A new study has found that small banks have a greater compliance burden than larger banks – but the extra expenditure isn’t leading to higher ratings from regulators.  The study, conducted by three members of the Federal Reserve Bank of St. Louis’ bank supervision division, found that total compliance expenses for banks with assets of less than $100 million averaged 8.7 percent of non-interest expenses, while banks with assets of $1 billion to $10 billion spent 2.9 percent of non-interest expenses on compliance. The study was based on the results of a survey of 469 banks. It asked how much they spend for data processing, accounting and auditing, consulting, legal and personnel expense. “Total compliance expense ratios are lower for highly rated banks than for other banks in the less than $100 million asset size group and roughly the same across other size groups,” the paper noted. 

OCC Outlines 2017 Supervisory Plan

Expect OCC examiners to continue their focus on credit underwriting practices, particularly in portfolios with concentrations,  according to the Comptroller’s Fiscal 2017 Bank Supervision Operating Plan.  Regulators will evaluate whether banks are easing standards, “in structure and terms, increased risk layering, and potential fair lending implications. Reviews will focus on new products, areas of highest growth, or portfolios that represent concentrations, such as commercial and industrial, commercial real estate, and auto loans.” Other supervisory priorities include stress testing practices, strategic risk, including strategies focused on M&A, operational risks, interest rate risk, ALLL documentation and support, and cybersecurity. “Examiners will continue to use the Cybersecurity Assessment Tool at banks not examined in FY 2016 and follow up on any gaps,” the OCC reported.

Why are the Small Community Banks Disappearing?

The number of banks with less than $100 million in assets has declined by more than two-thirds since 1995, Federal Reserve Governor Jerome Powell told the “Community Banking in the 21st Century” fourth annual Community Banking Research and Policy Conference.  Reasons for the decline include organic growth, mergers or acquisitions, failures after the financial crisis, and the lack of de novos in recent years.  Powell pointed out that profits have declined since 2015 at banks with assets from $100 million to $300 million. “Time will tell whether this is an anomaly or the beginning of a pattern,” he said.  He said “the key question for policymakers” is whether the acceleration in the rate of decline for small banks is a structural change—or if efforts by the FDIC to encourage more de novos, combined with higher interest rates, will reverse it.   

Get Ready for the Next Crisis Before it Hits

Bankers – and regulators – need to “prepare for the next storm clouds,” warns the Federal Reserve Bank of Philadelphia’s Bill Spaniel in Community Banking Connections.  Rising pressure on bank balance sheets, increased operational risk, and volatile capital market trends are troubling signs. Low interest rates, competition and increased compliance costs have led banks to consider mergers and acquisitions, and some are questioning the viability of the community bank business model. “Preparation is the key to being ready for the next negative turn in the credit cycle,” he wrote. “The steps we take now will determine how well we weather the conditions ahead…. It’s important to pay attention to the fundamentals, such as capital planning, strong underwriting standards, and appropriate provisioning, especially as the banking industry looks to continue rebuilding capital and earnings.”

Even Unbanked Want Online Banking

Underbanked households have smart phones and are more likely to use them for banking than fully banked households, FDIC Chairman Martin J. Gruenberg told the FDIC’s 16th Annual Bank Research Conference.  More than 60 percent of bank customers are using online banking, while about 32 percent are using mobile banking, he said. “Although we know that mobile services are being rapidly adopted by a wide variety of consumers and institutions, it is not clear if the technology’s full potential is being leveraged to expand inclusion in the banking system,” he said.