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The Examiner

“Training is everything.
The peach was once a bitter almond;
cauliflower is nothing but cabbage with a college education.”

- Mark Twain
Born this day, 1835

In this Issue...

Charles G. Cooper and John Ryan Talk Community Banks in Promontory Webinar

Texas Department of Banking Commissioner Charles G. Cooper and CSBS President and CEO John Ryan joined Barb Rehm, senior managing director at Promontory Interfinancial Network in a webinar to discuss the Business of Community Banking on Nov. 6. The full webinar can be accessed here

Below are some highlights from the conversation: 

On the biggest outside threat to banks: 

Charles G. Cooper: “What keeps me up at night is the danger that we are facing from cybersecurity issues. And I don’t think we can talk about it enough...Banks have a credit culture. They also now need a cyber culture. Everyone in the bank needs to be involved…The attacks are becoming more sophisticated and we have to evolve with it.” 

CSBS has been conducting the most comprehensive cybersecurity training in our history. We have trained more than 1,000 bankers and we have begun doing the same for state examiners. 

On liquidity: 

John Ryan: “Banks and nonbanks have high-level potential risk around liquidity, and as a subset, liquidity funding and funding for the community bank model.” 

Charles G. Cooper: “We’ve been dealing with liquidity for a while – I call it the banks that are running hot – where they have a high loan-to-deposit ratio and less liquidity than they’ve had before, as John mentioned, more reliance on noncore funding. And when you get down to why this happens, it is really common sense. There is more competition now for core deposits and some of that is coming from the big banks, and we haven’t seen that before, or as much.” 

On new leadership in the federal financial agencies: 

Charles G. Cooper: “We have some highly qualified and gifted individuals. They understand community banking...The stars are aligned, I think, to be able to work together closer than we have before.” 

On Community Reinvestment Act Reform:  

Charles G. Cooper: “It has been a long time since the Act came about in the '70s, and the world has changed so many times since then. I get concerned about how the federal regulators that are trying to examine for CRA. They try to apply old standards to new technology. It is pretty hard to do, so I think something should be done.” 

Federal Reserve Bank of Cleveland President and CEO Loretta Mester shared her views about the CRA at the Fed-CSBS-FDIC Community Banking in the 21st Century Research and Policy Conference held this past October. 

On the Bank Secrecy Act:  

John Ryan: “BSA was rated the highest compliance cost of all compliance issues in our annual community bank research conference. There is a need to do something differently around this. I think technology could be a part of the solution.”  

What is the future of community banks? 

Charles G. Cooper: “It really depends what your clientele is and what [is] your age of your clientele. Deposits are what you are going to have to get. Loans are not going to be as bad, but with all the competition we’ve got there, that is going to increase also. But you can’t just stay where you are right now.”  

CSBS is developing an indicator of community bank sentiment. See here for initial findings.  

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FFIEC Update: Examination Modernization Project

FFIEC Emphasizes Risk-Focused Supervision in Second Update of the Examination Modernization Project

The Federal Financial Institutions Examination Council provided a second update on its Examination Modernization Project.
The project identifies and assesses ways to improve the effectiveness, efficiency, and quality of community financial institutions safety and soundness examination processes, particularly through increased use of technology.  In March, the FFIEC issued a press release providing a first update on the Examination Modernization Project. 

As an initial step, the Fed Board, the FDIC, the NCUA, the OCC, and the State Liaison Committee (a state regulator-led, voting member of the FFIEC) reviewed and compared principles and processes for risk focusing examinations of community financial institutions.  

This review concluded that the state and federal regulators have developed and implemented similar programs and processes for risk tailoring examinations.  Common risk tailoring principles and practices include:

  • Recognizing there are financial institutions, or areas within institutions, that present low risk, and in those cases, minimum examination procedures are generally sufficient to assess the institution’s condition and risks.
  • Allocating more examination resources to higher risk areas and fewer resources to lower risk areas. 
  • Using data from the quarterly Call Report filings to monitor changes to the institution’s business model, complexity, and risk profile between examinations.
  • Leveraging available information, including analyses and conclusions from ongoing offsite monitoring and previous examinations to determine the financial institution’s risk profile and the scope of the next examination.
  • Considering the financial institution’s ability to identify and control risks when risk-focusing examinations.  
  • Tailoring the pre-examination request list to the institution’s business model, complexity, and risk profile. 
  • Contacting institutions between examinations or prior to finalizing the scope of the examination to help inform an examiner’s assessment of an institution’s risk profile.
  • Following up between examinations on institutions’ actions taken to address areas in need of improvement.

The FRB, FDIC, NCUA, OCC, and SLC each committed to issue reinforcing and clarifying examiner guidance to their examination staffs on these risk-focused examination principles if necessary. Examiner guidance has or will cover the following community financial institution examination risk-focusing practices:

  • Consider the unique risk profile, complexity, and business model of the institution when developing an examination plan.
  • Analyze existing information such as Call Report data, publicly available information, and confidential supervisory information to help identify areas of higher and lower risk when planning examinations.
  • Monitor financial institutions between examinations.
  • Tailor the document request list based on the financial institution’s business model, complexity, risk profile and planned scope of review.  
  • Apply examination procedures in a way that reduces the level of review of low risk institutions or low risk areas.
  • Discuss financial conditions, risk profiles, new or expanded business lines, and pertinent new supervisory or regulatory information with institution management prior to finalizing the scope of review.

Examiners will generally discuss the examination plan and its rationale with institution management at the beginning of the examination.

The FFIEC members may take further actions on the other areas of the examination process as the Examination Modernization Project progresses.

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In the Media

OCC lowering assessment fees: Via Politico Pro, Reuters and others, Otting announced a 10% reduction in semiannual assessments it charges its regulated banks. The OCC uses a scale of assessments that is based on an institution's size. In another change, the OCC said it would refund banks that leave the federal banking system within the first half of an assessment period but not in the second half.

Miki Bowman sworn in: The Wall Street Journal reported former Kansas state bank commissioner Michelle “Miki” Bowman was sworn in on the Federal Reserve's Board of Governors for a term ending in Jan. 2020. Governor Bowman was confirmed by the Senate on Nov. 15. CSBS supported Bowman’s appointment and advocated for the statutory requirement that at least one member of the Fed board have experience as community bank regulator or community banker.
New CFPB leadership: The full Senate is expected to vote to confirm Kathy Kraninger to head the CFPB next week. Read more from the American Banker and the Washington Post

Federal flood insurance extended: The Advocate (Louisiana) covered Congress passing another short-term extension of the National Flood Insurance Program. This is the eighth temporary extension since it first came up for periodic renewal more than a year ago. There was no agreement on broader reforms to the NFIP. A lapse in the program halts new policies that federally backed mortgages require for property in high-risk areas, impacting home sales. 

FDIC and Fed talk fintech and risk: Atlanta Federal Reserve Bank President Raphael Bostic said he has spoken to a lot of financial technology entrepreneurs who aren't thinking enough about risk during remarks at a conference in DC and reported by Politico Pro. FDIC Chairman Jelena McWilliams warned that the FDIC is closely monitoring banks’ exposure to loans shared with nonbanks, saying “I am holding my opinion on whether or not fintechs represent systemic risk … They represent some type of a risk to the system, but we need to know what it is.” Read more from American Banker. To read McWilliams' full remarks, click here

Quarles to chair Financial Stability Board: Federal Reserve Governor Randal Quarles’ appointment to chair of the Financial Stability Board, a body that has been coordinating new banking rules for the G20 since the global financial crisis a decade ago, was widely reported

Bonus: Politico Magazine published an in-depth profile of Sen. Elizabeth Warren (D-Mass.). Read about her early career connection with Dr. Phil and more.

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