Iowa Day with the Superintendent April 12, 2007 Neil Milner CAE President and CEOConference of State Bank Supervisors, Inc.
CONFERENCE OF STATE BANK SUPERVISORS Champions of the State Banking System Statement of PrinciplesState System of Banking> Our overriding goal is to maintain the state system as the charter of choice for community, multi-state, international and de novo financial institutions.> The states must retain their role as the front-line, grass-roots regulator for the financial services industry.> As state bank supervisors, we work at both the state and federal level for focused and efficient bank supervision.> Federal regulatory preemption of state laws endangers the dual banking system and consumer protection.> Through CSBS, the collective states have a single voice with Congress and federal policy makers and an organization for maintaining a pool of well-trained, focused banking regulation professionals.
CONFERENCE OF STATE BANK SUPERVISORS Champions of the State Banking System Statement of Principles (cont.)Safety & Soundness of Financial Institutionsand the Banking System> We believe that a significant goal of bank supervision and examination is to assure the safety and soundness of individual financial institutions and the overall banking system.> Cooperation between state and federal regulators strengthens bank supervision, the financial services industry, and the economy.> We support financial independence and budget autonomy for state banking departments as they pursue excellence in supervision.
CONFERENCE OF STATE BANK SUPERVISORS Champions of the State Banking System Statement of Principles (cont.)Compliance with Banking and Consumer Laws> We believe that bank supervision at the state level provides regulators that are accessible, who understand state laws, are in tune with the local economy, and knowledgeable about the consumer.> We agree that for the supervision of interstate banks, the home state banking supervisor should be the primary regulator.
CONFERENCE OF STATE BANK SUPERVISORS Champions of the State Banking System Statement of Principles (cont.)Promoting Economic Development> We recognize that community banks, most of which are state-chartered, drive the economic success of Main Street America.> We support the authority of our states to empower banks to develop new services that serve the best interests of our citizens. Approved by the CSBS Board of Directors, September 2006
Improved Website!! www.csbs.org Board & IT areas restricted New Features on our website Event registration Pay membership dues online Improved Regulatory area Examiner Resource Links Mortgage Licensing Systems working together: Website & membership database interfaced Database & accounting interfaced
2007 Annual Meeting &Conference> Coeur d’Alene, ID> May 30 – June 1, 2007> NEW: Industry All Day Session> Marketing Save the Date Cards & Eblast Exhibitor/Sponsor Prospectus Preliminary Program> Register TODAY!!!! www.csbs.org
CSBS/AARMRMortgage Licensing System > Two primary objectives: Provide uniform mortgage application for every agency Develop comprehensive registry of record for participating states to house the information from the uniform application
System Schedule> System to go live 1/1/2008> Uniform annual renewal and annual reports to go live end of 2008> 7 states using MU Forms, expect another 9 over next 3 months> 29 States signed “Statement of Intent” to try to come on the System by the end of 2009> Quarterly functional upgrades to System throughout 2008 & 2009> Expect 4-6 states to come onto system quarterly throughout 2008 & 2009
FFIEC- States have a VOTE> SLCFFIEC –STATES HAVE A VOTE Chair- Steve Antonakes (MA - CSBS) Sandra Branson (MO - NASCUS) Bill Waits (NJ - ACSSS) Mick Thompson (OK – At Large) Eric McClure (MO – At Large)> Taskforces & Working Groups> Representation State and CSBS Staff Guidelines
Risk Based Capital: Basel IA> CSBS supported direction of the initial proposal> Current proposal scaled back significantly> Residential mortgage loans risk weighted by LTV> Risk Ratings for external credit ratings Little applicability in the loan portfolio for most banks> Short-term commitments risk weighted with a 10% conversion factor
Risk Based Capital: Basel IA > No changes… Small business loans Multifamily residential loans Non-current loans Commercial real estate exposures > Will provide some appropriate relief to community banks. > Opens a door to incremental changes – positive and negative. DO NOT DISCOUNT ITEMS IN THE ANPR – PERHAPS A LOOK INTO THE FUTURE. > The proposal is an opt-in. Banks can choose to remain under the current rules. CSBS: Not worth the effort!
Who would want RBC relief? Domestic Bank Capital, Performance & Exposures As of 12/31/06 Total Risk Based Capital < 10% Banks = 58 Avg Assets Leverage RBC ROA(1) ROE(1) Loans/Assets 1-4/Loans All Commercial CRE/RBCSmallest 13,326 3.55% 6.63% 47.61% 3.72% 5.66% 0.67%Largest 4,178,523 9.19% 9.97% 2.35% 33.92% 100.00% 89.67% 79.96% 810.07%Average 289,522 6.92% 9.38% 1.05% 13.80% 83.21% 26.03% 45.23% 403.90%Median 108,650 7.04% 9.66% 1.01% 11.81% 85.29% 18.87% 45.25% 426.08% 27 bank s >20% 40 bank s > 300% Total Risk Based Capital > 10%, < 10.51% Banks = 421 Avg Assets Leverage RBC ROA(2) ROE(2) Loans/Assets 1-4/Loans All Commercial CRE/RBCSmallest 12,684 5.51% 53.71% 0.00% 0.00% 0.00%Largest 142,273,327 13.10% 4.83% 49.85% 156.13% 80.76% 96.46% 952.66%Average 1,215,993 7.88% 10.28% 1.12% 13.55% 85.24% 21.56% 47.96% 411.05%Adj. Avg (3) 880,142Median 253,358 7.85% 10.29% 1.03% 12.49% 85.47% 20.04% 48.49% 407.01% 212 bank s > 20% 301 bank s > 300%(1) Does not include 18 unprofitable institutions.(2) Does not include 3 unprofitable institutions.(3) Adjusted by eliminating the largest institution.
Risk Based Capital: Basel II > Numerous unresolved issues between the agencies. Standardized Approach Safeguards (transition periods, leverage ratio, 10% aggregate drop) > This will be the first time the U.S. has had different capital rules for different types of banks.
Risk Based Capital: Basel II State System Perspective > Need to consider Standardized Approach in the U.S. > What is the systemic impact from multiple capital rules? Competition Consolidation Safety & Soundness > State regulator access to confidential reporting data from Basel II banks. Institution only versus a view of the system
How do you measure competitive Bank Capital & Performance by Country disadvantage? Top 1000 Banks by Tier One Capital Banks Removed Tier 1 Capital Return on Equity Affect on Affect on Average Average Leverage Return from from Banks in Ratio on Equity Sampling SamplingCountry 1000 > 20% < 0% Average Median Change Average Median ChangeUSA 215 5 3 8.34 8.05 -0.76 24.00 22.50 0.23United Kingdom 32 4 2 7.18 6.01 -4.59 18.88 15.45 3.30Switzerland 35 0 0 8.33 7.67 0.00 12.71 11.50 0.00Spain 46 1 0 6.35 5.98 -0.30 17.48 16.75 -0.30Japan 95 0 4 4.58 4.48 0.05 12.04 10.50 1.04Italy 37 0 0 6.24 5.26 0.00 19.31 18.20 0.00Germany 80 0 2 4.62 4.41 0.07 11.35 9.55 0.49France 10 1 0 5.28 4.39 -8.36 20.76 18.05 1.78Canada 11 0 0 5.00 4.23 0.00 20.94 23.30 0.00Source: The Banker, July 2006
Commercial Real Estate Guidance > Issued by agencies on December 6, 2006 > Two key thresholds as % of Capital 100% Construction & Land Development 300% CLD, multi-family & CRE **Thresholds do not apply to OTS supervised institutions. > Expectations Stress testing Market analysis Underwriting according to secondary market standards More Capital! > We must be vigilant in ensuring the guidance is implemented as stated Thresholds are not limits Does not discourage CRE lending > Examiner training will be key
Mortgage Products: NontraditionalFederal financial agencies released their final guidance on September 29.CSBS/AARMR released parallel guidance on November 14 Applies to state-licensed mortgage providers who were not covered by the interagency guidance. Closely mirrors interagency guidance, but without provisions that are inapplicable to mortgage providers (portfolio management, capital levels, etc.)As of April 11, 31 states plus D.C. have adopted the guidance
Mortgage Products: Sub-Prime Mortgage Products: NontraditionalConsumer advocacy groups and Congress have expressed concern with 2/28 & 3/27 ARMS. Fixed at above market rate for 2 or 3 years, re-price each 6 months after initial period. Designed to “repair credit.” Payment shock after initial period is significant.Policy Statement:1. Qualify customers at full-indexed, amortizing rate.2. Timely, clear disclosure3. Balanced marketing4. The fine line between sub-prime & predatory!CSBS will draft parallel guidance similar to NTM.
Risk Based Assessments Components > Weighted CAMELS (25%, 20%, 25%, 10%, 10%, 10%) > Six Financial Ratios > Long-term debt issuer rating Well Capitalized banks pay between 5 and 7 basis points (others pay between 10 and 43). Well Capitalized de novo banks pay 7 basis points for five years, beginning in 2010. **Know your ratings definitions – they now have a financial impact!**
GETS/WPS> Government Emergency Telecommunications System FREE Use “Calling Card” GETS provides emergency access and priority processing in the local and long distance segments> Wireless Priority System program for priority cellular network access WPS is accessed by dialing 272 before the destination number using a phone that has been subscribed with the WPS Feature.
BSA Exam Manual Update> BSA/AML Examination Procedures Update scheduled for Fall 2007> InfoBase training CD available on FFIEC website> Available TRAINING: CSBS Boot Camp for BSA professionals – 2007 Annual BSA Conference FFIEC Annual Conference- Pilot 2007
BSA – State MOUs> FinCEN • 40 banking departments have signed the information sharing agreements • 8 are in the review or final stages of process • 6 other states need to change their statutes prior to having the ability to sign the agreements> IRS • 35 have signed> OFAC MOU • 9 states have signed
Congressional Agenda Items > New Congress the 110th > Government sponsored enterprises – regulating housing finance Will be introduced and marked-up in the House Financial Services Committee in the near future (the recent mark-up was temporarily postponed). > Predatory Lending > Data Security > Preemption > Terrorism Re-Insurance Act (TRIA) > Regulatory relief (Signed into law on October 13, 2006 PL 109-351)
Regulatory Burden Reduction> Legislation passed the Congress as S. 2856 and was signed into law on October 13, 2006, as P.L. 109-351.What CSBS called for in testimony> Focus on Community Banking (Communities First Act, Rep. Ryun, R-KS) Several provisions were added to the House Bill)> Flexibility for state chartered Federal Reserve member banks> Review of Riegle-Neal interstate branching> IRS re-interpretation on tax status of LLCs> State vote on FFIEC> Interstate supervision policy> Review of federal “regulatory” preemption policyThe law includes:
State Vote on FFIEC > The State Liaison Committee’s role was one of advising the FFIEC on issues > When it came time to vote or a member called for an “executive session,” the state groups had to sit on their hands > We asked for a real vote on the FFIEC > This is now LAW and the State Liaison Committee now has a VOTE on the FFIEC
Extended Exam Cycle> Extend 18 month examination cycle to well capitalized, well managed banks under $500 million (up from $250 million on old law).> It has been suggested that the Federal Deposit Insurance Fund would be alive and well even if all banks under $500 million failed…> Due to a drafting error in S. 2856, the 18 month exam cycle did not apply for certain well-managed, well-capitalized institutions with “good” ratings. The Congress passed H.R. 6345 during the lame duck session to include the “good” rated institutions.
Litigation> Wachovia v. Burke (appealed to Supreme Court Cert. pending)> Watters v. Wachovia (Argued before the Supreme Court in November…pending decision any time now)> National City v. Turnbaugh (appealed to the Supreme Court Cert. pending)> OCC/NY Clearinghouse v. Spitzer (appealed to the 2nd Circuit…decision on hold pending Watters case)
interstate compared to one-statebanks, state and national
Professional Development“Developing Financial Professionals” > BSA Boot Camps > Problem Bank School > Real Estate Appraisal > Fraud Identification > MSB Examiners Course
Professional Development (con’t)“Developing Financial Professionals” > BSA Boot Camp 10 Boot Camps & 3 Mini Camps Conducted Intensive hands on exercise based program 209 State & Federal Regulators from 34 states 181 Bankers and Industry participants New Prepaid Card Mini-Camp Developed Intensive 1 ½ day exercise based program Precourse programs First Session: Las Vegas, February 25-26 Second Session Scheduled for the Seidman Center, April 23-24 Certified Anti-Money Laundering Specialist New Certification Designation Available Education Requirements On-the-Job Experience Attestation of Supervisor Continuing Education Credits
Professional Development (con’t)“Developing Financial Professionals” > Problem Bank School 4 ½ day Blended Learning Program Morning – Lectures & Case Studies Afternoon – Web-Based Bank Simulation (with a problem institution) Update March 2007 Learn how to: Reconcile correspondent bank accounts Trace loan proceeds identify red flags risk focus the exam identify and prevent fraud draft enforcement actions document to prevent or prepare for litigation
Professional Development (con’t)“Developing Financial Professionals” > Real Estate Appraisal Review 5-week web-based course 8 to 10 hours a week Learn how to: Effectively use appraisal reports Describe the various types of appraisal reports Explain the appraisal valuation process Describe the identification aspects of highest and best use analysis step of the appraisal valuation process Describe and apply the cost, direct sales comparison, and income capitalization approaches to valuation.
Professional Development (con’t)“Developing Financial Professionals” > Fraud Identification Training 5-week web-based course 21 real-life case studies 6 to 8 hours a week Learn how to: Identify weaknesses in internal controls that may lead to fraud Recognize “red flag” issues that may require additional examination procedures Identify measures that could correct internal control weaknesses noted Recognize the importance of investigating weak internal control programs
Professional Development (con’t)“Developing Financial Professionals” > Money Service Business Examiners Course (online) 3 Courses conducted since April 2006 57 State and Federal Regulators from 20 states 2 Industry participants Exam-focused curriculum BSA/AML component Two more programs 2007
Contact Information:Neil Milner CAEPresident & CEOConference of State Bank Supervisors1155 Connecticut Avenue NW – 5th FloorWashington, DC 20036(P) 202.728.5702(F) firstname.lastname@example.org