Read Between the Lines

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

What a Trump Administration Means for Community Banks

A Trump administration will likely mean changes to the Dodd-Frank Act, the controversial regulatory reform bill passed after the financial crisis. Republican control of the House and Senate may give new life to the 512-page proposed replacement from House Financial Service Chair Jeb Hensarling of Texas, “The Financial Choice Act”. Hensarling met this summer with President-elect Donald J. Trump to discuss the proposal, which was formally introduced in September.

Among other things, the bill would allow the largest, best-rated banks to opt out of Dodd-Frank and Basel III requirements if they maintain a 10 percent leverage ratio, though that would require billions in additional capital. The proposal would replace the Consumer Financial Protection Bureau with a Consumer Financial Opportunity Commission, run by a five-member panel rather than a powerful director. It would end too-big-to-fail and relieve the regulatory burden on community banks by streamlining their Call Reports.  Hensarling’s committee says the plan “requires financial regulatory agencies to appropriately tailor regulations to fit an institution’s business model and risk profile, thereby reducing dead-weight compliance costs and allowing banks to devote more of their operating budgets to meeting customer needs.” Trump’s transition website said the new team will be working to “dismantle” Dodd-Frank and replace it “with new policies to encourage economic growth and job creation.” Stay tuned.

OCC Will Establish Innovation Office

The OCC will open a central office for innovation in the first quarter of 2017, Comptroller of the Currency Thomas J. Curry said in a recent speech. The office will conduct outreach, provide technical assistance and work with banks and fintech companies that need regulatory advice. “Having an open dialogue with regulators in developing a pilot also helps by encouraging product and system designers to ask the right questions as they determine a product’s features and the parameters of the test,” he said. It will also ensure that new products meet consumer protection standards. Curry noted that the OCC is still evaluating the question of whether fintech companies could ever get bank charters.

CRE Section of Comptroller Handbook Updated

Worth Reading: The OCC has updated key sections of its “Community Bank Supervision” booklet, incorporating updated guidance on concentration risk management, stress testing, appraisals and more. 

FDIC to Discuss Succession Planning

Expect the next meeting of the Federal Deposit Insurance Corp.’s community bank advisory committee meeting to include a discussion on succession planning. FDIC Chairman Martin J. Gruenberg asked the committee to include the topic, saying “it comes up in every meeting we have with bankers.”

CRE Focus Continues

Regulators are approaching CRE concentration risk management on an interagency basis, with frequent communication about the issue. “We want to make sure we are out front of any problems,” said Doreen R. Eberley, FDIC director of the division of risk management supervision, at an FDIC community bank advisory committee meeting in November. She said they expect community banks to have concentrations but they want to make sure they are managing them correctly. If a regulator asks a bank to maintain higher capital levels because of its CRE levels, then that is probably related to weaker underwriting or other deficiencies, she said.

Tips on Managing CRE

Regulators from the FDIC and OCC gave these CRE concentration risk management tips at the New York Bankers Association Financial Services Forum in October:

• A bank’s CRE strategy should be included in its strategic plan
• Identify exceptions and track them
• Tie stress testing to the capital planning process
• Make sure the board has information on the assumptions used
• Identify what risk management parameters have changed
• Justify interest only loans, refinancing risk
• Make sure board minutes include discussions about changing trends
• Link stress testing to risk management
• Make sure market analyses are sufficient.