“Let us make our position crystal clear: We are against this weather.” -- The Times of London, July 14

If finding common ground is a key part of leadership, it seems that The Times of London staked out an anti-rain position upon which all citizens of the United Kingdom can agree as the Olympic Games approach.  While fretting about the weather seems a trifle un-British to us, we certainly can sympathize. Just as a bride-to-be hopes for a perfect wedding day, they want to present their best face to the world. But the weather is what it is.  That somehow reminds us of Henry Ford’s comment to his workers that he agreed that their pay should be higher – and that it should be warmer in the winter and cooler in the summer.
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CSBS Chairman Gonzales Writes Open Letter to State Examiners

CSBS Chairman Greg Gonzales sent an open letter to state bank examiners this month to address community banking issues and a recent study on state bank supervision. 

In the letter, Gonzales conveys a very important message about the critical role of community banks, highlights the state system’s priority in banking over the next year and addresses criticisms of state bank supervision. 

“Community banks represent an important element of our economic fabric,” Gonzales, Commissioner of the Tennessee Department of Financial Institutions, wrote. “However, they are under duress and have an uncertain view of the future.”

To guide policy views on the issues impacting community banks, CSBS has formed a Community Banking Steering Group that is currently working to identify unnecessary burdens affecting community banks and opportunities where the supervisory approach can have a more positive impact.  Gonzales acknowledged the work of the Federal Deposit Insurance Corporation (FDIC) in conducting research on the evolution of community banks and its efforts to foster a dialogue with community bankers through regional roundtables around the country.

“We believe this will be critical to understanding the long-term consolidation of the industry and laying an empirical foundation for the value of community banks,” Gonzales wrote. 

Gonzales also addressed the findings of a study published earlier this year that claims state supervisors are more lenient than their federal counterparts and are “captured” by the banks they supervise.  CSBS took strong exception to these assumptions.  “We believe analyzing examination ratings outside of the context of how supervision is actually conducted represents a fundamental flaw in the study,” Gonzales wrote.  “CSBS, working with state supervisors, will do everything we can to address flaws in the study as well as work to initiate more productive research in this area.” 

Gonzales said the goals of the letter were to address issues particularly concerning to state examiners and to recognize the important role they play. “Examiners are in the banks doing very detailed work on complex issues,” Gonzales said.  “They are the ones making the tough calls and interacting with the bankers.  It’s not always easy work, but it’s very critical.”

Gonzales’ open letter to state examiners is available here. 
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FSOC Designates Financial Utilities as Significantly Important, Releases 2012 Annual Report

The Financial Stability Oversight Council (FSOC) voted Wednesday to designate eight financial market utilities as systemically important.  “This action, the first designations made by the Council, represents another key step toward creating a safer, more resilient financial system,” wrote the U.S. Department of Treasury in a press release.

The eight firms designated include: The Clearing House Payments Company LLC, CLS Bank International, Chicago Mercantile Exchange, The Depository Trust Company, Fixed Income Clearing Corporation, ICE Clear Credit LLC, National Securities Clearing Corporation, and The Options Clearing Corporation.

FSOC also released its 2012 annual report Wednesday.  The report describes the activities of the Council, outlines significant financial market and regulatory developments, analyzes potential emerging threats, reports on certain determinations of the Council and makes several recommendations in order to enhance the integrity, efficiency, competitiveness and stability of U.S. financial markets.

John P. Ducrest, Commissioner of the Louisiana Office of Financial Institutions and FSOC member, issued a statement following the release of the FSOC annual report.  “The report is an important assessment of our financial system, which I believe all financial institutions should review and consider as part of a broader assessment of risks,” Ducrest wrote.

In particular, Ducrest stated the report appropriately acknowledges earnings challenges posed by the low interest rate environment. “This is a policy choice the Federal Reserve has made to support economic growth.  Unfortunately, the extended low rate environment has a corrosive effect on a bank’s net interest margin.  Bankers have had to exercise great skill to manage this scenario in an effort to preserve or achieve profitability.  We must also realize that these efforts are creating additional interest-rate risk and may amplify credit risk in the future,” Ducrest said.

The FSOC 2012 annual report is available here.
 
Ducrest’s statement on the FSOC report is available here. _________________________________________________________

Senate Money Laundering Report Cites Compliance Failures at HSBC

HSBC Holdings PLC (HSBC) executives apologized Tuesday during a Senate hearing on U.S. vulnerabilities to money laundering for not having the proper controls in place to prevent opening its U.S. affiliate bank to terrorist organizations, drug cartels and other criminal groups accused of using accounts within the bank to launder money.

The apology followed a U.S. Senate report by the Senate Homeland Security Committee’s Subcommittee on Investigations, which found HSBC allowed its U.S. affiliate bank to evade global anti-money laundering (AML) laws and failed to flag transfers coming in from countries that should have raised concern.
 
In the Senate report, HSBC was found to have longstanding, severe AML deficiencies, high AML risks associated with HSBC affiliates, and a lack of regard concerning evidence linking accounts to terrorist financing.  The report also makes recommendations to ensure the U.S. affiliate bank does not leave AML risks to the U.S. financial system unattended and calls on the Office of the Comptroller of the Currency (OCC) to improve its approach to resolve AML issues in a more effective and timely manner.

“The problem here is that some international banks abuse their U.S. access,” said Subcommittee Chairman Carl Levin (D-MI).  “The OCC’s new leadership needs to move swiftly to correct the previous oversight shortfalls and assure that promised changes at HSBC are implemented promptly and effectively.”

Testifying during the hearing, Comptroller of the Currency Thomas J. Curry told lawmakers he agrees with the report’s recommendations regarding the OCC oversight of HSBC’s U.S. affiliate and intends to fully implement those recommendations.  This includes the recommendation for the OCC to align its practice with other federal bank regulators by treating AML deficiencies as a safety and soundness matter, to establish policy directing that supervision staff work with enforcement and legal staff to conduct institution-wide examinations of a bank’s AML program, and to consider use of formal or informal enforcement actions. 

The full report is available here. _________________________________________________________

Around the States

PA: Governor Tom Corbett announced Monday that the structure, duties and name of the Pennsylvania Securities Commission will change on Oct. 1 to the Department of Banking and Securities.  The functions and positions located in the Securities Commission will consolidate into the Department of Banking to form the new Department.  The Office of the Budget estimates that the merger will save taxpayers approximately $1 million, with even greater savings being realized in the longer term.  “I am confident that Secretary of Banking Glenn Moyer and Securities Commissioners Robert Lam, Steve Irwin and Vincent Gastgeb will work together to ensure a smooth transition so that businesses, consumers and investors will continue to be served at a high level,” Governor Corbett said. Read more.

WY: CSBS announced that the Wyoming Division of Banking (the Division) has received a certificate of accreditation, certifying that the Division maintains the standards and practices in state banking supervision set by CSBS’s Accreditation Program.  The Division received its first CSBS accreditation in 1992 and has been accredited for more than 20 years.  “To be recognized for our commitment to sound and effective bank supervision in Wyoming is an honor,” Wyoming Banking Commissioner Albert Forkner said.  “The Division staff works diligently to provide the quality supervision that citizens and banks in Wyoming deserve.” 
Read more. 
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Around the Agencies

CFPB: The Consumer Financial Protection Bureau (CFPB) adopted a rule to begin supervising larger consumer reporting agencies, which include what are popularly called credit bureaus or credit reporting companies.  This is the first time these companies will be supervised at the federal level.  “Credit reporting is at the heart of our lending systems and enables many of us to get credit, afford a home, or get an education,” said CFPB Director Richard Cordray. Read more.

CFPB: The CFPB held a field hearing in Detroit Monday in an effort to gather information that will help the agency in its approach in overseeing credit reporting companies.  “We are thinking hard about issues in the credit reporting market, and we do not yet have all the answers worked out by any means. We need your help and your insight,” CFPB Director Richard Cordray said in his prepared remarks. Read more.

CFPB: The CFPB announced this week its first public enforcement action with an order requiring Capital One Bank (USA) to refund approximately $140 million to two million customers and pay an additional $25 million penalty. The action results from a CFPB examination that identified deceptive marketing tactics used by Capital One’s vendors to pressure or mislead consumers into paying for “add-on products” such as payment protection and credit monitoring when they activated their credit cards. “Today’s action puts $140 million back in the pockets of two million Capital One customers who were pressured or misled into buying credit card products they didn’t understand, didn’t want, or in some cases, couldn’t even use,” CFPB Director Richard Cordray said Wednesday in a press release. “We are putting companies on notice that these deceptive practices are against the law and will not be tolerated.” Read more.

FHFA: Refinance volume is continuing to rise with more underwater borrowers refinancing through the Home Affordable Refinance Program (HARP). According to the Federal Housing Finance Agency’s (FHFA) latest Refinance Report, HARP loans represented 20 percent of total refinance volume in May, the largest increase since the program was launched in 2009. Read more.

FRB: Minutes from the Federal Reserve’s June Federal Open Market Committee (FOMC) meeting revealed that officials expect the U.S. economy to continue expanding more slowly than expected, with the unemployment rate falling “only slowly.”  The policy-setting board continued discussing the prospect of further monetary stimulus, but indicated it would hold the fed-funds target at near zero. Read more.

FRB: The FRB on Thursday reaffirmed its long-standing policy of applying relevant international risk-management standards to the Federal Reserve Banks' Fedwire funds and Fedwire securities services.  In a press release, the FRB stated that these services play a critical role in the financial system and in facilitating the safe and efficient settlement of private-sector financial market utilities.  Read more.

OCC: The OCC announced Donna Deale has been named Deputy Comptroller for Thrift Supervision. In this role, Deale will report to the Senior Deputy Comptroller for Midsize and Community Bank Supervision and lead the OCC’s ongoing effort to fully integrate the supervision of federal savings associations into its mission while ensuring a balanced, consistent interpretation and application of supervisory policies to the thrift industry. 
Read more.

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Around D.C.

FANNIEMAE: Fannie Mae launched “Know Your Options Customer Care,” a customer engagement strategy and training program for servicers aimed at preventing foreclosures by developing consultative relationships with struggling homeowners.  Under the program, Fannie Mae personnel conduct training for servicers’ call center employees, provide scripting for interactions with homeowners and help implement ongoing quality control measures.
Read more at http://www.fanniemae.com/portal/about-us/media/corporate-news/2012/5779.html.

ICBA: The Independent Community Bankers of America (ICBA) expressed strong concerns with proposed rules to implement Basel III capital standards in a meeting with Federal Reserve officials last week. In a meeting with Federal Reserve Governor Elizabeth Duke and other senior officials, ICBA community bankers and staff said that proposed risk weights would impose excessive burdens on community banks.  Read more. _________________________________________________________

Upcoming Events

July 24: The House Finance Committee’s Subcommittee on financial institutions will hold a hearing titled, “Examining Consumer Credit Access Concerns, New Products and Federal Regulations” Tuesday at 10 a.m. in the Rayburn House Office Building.
Read more.

July 24: The House Finance Committee’s Subcommittee on insurance and housing will hold a hearing titled, “The Impact of Dodd-Frank’s Insurance Regulations on Consumers, Job Creators, and the Economy” Tuesday at 2 p.m. in the Rayburn House Office Building.
Read more.

July 25: The House Finance Committee will hold a hearing on the FSOC 2012 annual report. The hearing will take place at 9:30 a.m. in the Rayburn House Office Building.
Read more.
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Closing Comment

“I would like to see additional reforms to the LIBOR process, assuming that LIBOR will continue to be a benchmark for financial contracts. Alternatively, there are a number of people looking at alternative benchmarks, like repo rates or the overnight index swap rate or other types of interest rates which have the advantage over LIBOR that they are market rates as opposed to simply reported rates.”

– Federal Reserve Chairman Ben S. Bernanke, during testimony before Congress, Bloomberg BNA Banking Daily, July 18.
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Catherine Woody, Editor
Rockhelle Johnson, Writer
Edward Smith, Contributing Editor