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CSBS Examiner

A weekly report of events affecting the state banking system from the Conference of State Bank Supervisors


 In This Issue...

 Upcoming Events...

State-Federal Supervisory Forum, Savannah, GA, May 21-23:   The State Federal Supervisory Forum is an annual gathering of senior executives in key leadership positions with state and federal regulatory agencies. Participants will discuss current and emerging policy and operational issues affecting state financial regulation and the state/federal regulatory partnership. The program will include formal presentations on a variety of important topics, open forum Q&A sessions, as well networking opportunities. 

Examiners Forum, Portland, OR, June 18-20:  The 2012 Examiners Forum is designed to bring together Senior Certified Examiners and other "seasoned" examiners to discuss current and emerging issues. 

Senior School, Indianapolis, IN, June 25-29:  Senior School is designed to meet the specific leadership training needs of state financial regulators who are rising into supervisory and/or management positions within their departments, serve as an examiner-in-charge in the field, or currently hold a managerial position within the agency. The behavioral science and management techniques presented are developed and honed each year to apply to the unique and evolving needs of financial regulatory personnel. 

Deputy Seminar, New Orleans, LA, July 30 – August 1:  The Deputy Seminar is an opportunity for key banking department officials to gather to learn about upcoming issues, share challenges, and learn potential solutions. 

 Legal Seminar, New Orleans, LA, August 1-3:  The Legal Seminar provides a forum for state banking department attorneys, assistant attorneys general assigned to the department, and other regulatory attorneys.  

“Do what you can, with what you have, where you are.” – Teddy Roosevelt

With all the hubbub today about Facebook’s IPO, it’s interesting to look at how technology has changed our world. We try to keep up with the new social tools, but let’s get real: It is the new generation – the Digital Natives – who grew up with technology and do not remember typewriters, snail-mail and LPs. But they do expect to have information at their fingertips 24/7. Thus the CSBS Education is working to move more of its training programs to an online platform as its main strategic initiative. One key goal is to have new examiners begin learning their tasks – online – the day they report to work. We’re calling it Day One – doing what we can with what we have, here and now.

Senate Confirms Federal Reserve Nominees

The Senate confirmed Thursday both of President Obama’s nominees to serve on the Federal Reserve Board of Governors, bringing the board to a full seven members for the first time since April 2006.

Harvard economist Jeremy Stein, a Democrat, was confirmed first in a 70-24 vote.  Former private-equity executive Jerome Powell, a Republican, was confirmed in a separate 74-21 vote.  Both Stein and Powell were nominated together in December in what appeared to be an attempt to garner bipartisan support and speed their confirmations.

“As the country continues to strive toward a full economic recovery, we need the full strength of the Federal Reserve Board,” said Conference of State Bank Supervisors (CSBS) President and CEO John W. Ryan.  “The system is better off having a Federal Reserve Board and an FDIC Board, working at full capacity to carry out the significant and complex work of setting monetary policy and supervising financial institutions.”

Stein previously served in the Obama administration in the Treasury Department and at the National Economic Council.  Powell served in the Treasury Department under President George H.W. Bush and is a visiting scholar at the Bipartisan Policy Center.

Federal Banking Regulators Finalize Large Bank Stress Testing Guidance …

Federal banking regulators issued final supervisory guidance this week on how the largest financial institutions should move ahead with internal annual stress testing exercises.
In the guidance, the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), highlighted the importance of stress testing at banking organizations as an “ongoing risk management practice that supports a banking organization's forward-looking assessment of its risks and better equips it to address a range of adverse outcomes,” the release stated.

The guidance outlines general principles for a satisfactory stress testing framework and describes various stress testing approaches and how stress testing should be used at various levels within an organization.  The guidance also discusses the importance of stress testing in capital and liquidity planning and the importance of strong internal governance and controls as part of an effective stress-testing framework. 

"The recent financial crisis underscored the need for banking organizations to incorporate stress testing into their risk management practices, demonstrating that banking organizations unprepared for particularly adverse events and circumstances can suffer acute threats to their financial condition and viability," regulators wrote in their final guidance.

Last July, CSBS submitted a letter to the FRB, FDIC and the OCC largely supporting the proposed guidance while offering suggestions on ways to improve the stress testing process and urging cooperation with state regulators. 

The final guidance on stress testing is available here. _________________________________________________________

… And Clarify Expectations for Stress Testing by Community Banks

In a second joint statement released along with the large bank guidance, federal banking regulators clarified supervisory expectations for stress testing at community banks. Acknowledging that the stress testing requirements imposed on larger institutions are raising some questions regarding the expectations for community banks, the agencies made clear that community banks are not required or expected to conduct the types of stress testing required for institutions above $10 billion in assets.

“This is an important, definitive statement from the agencies,” said John W. Ryan, CSBS President & CEO.  “As the federal agencies work to implement the reforms to improve the risk management and prudential standards for the largest financial firms, it will be important to draw a clear distinction on the expectations for the 7,200 banks with assets far below $10 billion.”

Staff Analysis: Q&A with Mike Stevens and Jeff Allen on the FRB’s Enhanced Prudential Standards Proposal

In December the Federal Reserve Board issued a proposed rule to implement Sections 165 and 166 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).  The proposed rule establishes enhanced prudential standards to strengthen regulation and supervision of large bank holding companies (BHCs) with assets above $50 billion and non-bank financial companies designated systemically significant by the Financial Stability Oversight Council (FSOC).  The proposal sets forth certain liquidity standards, requirements for overall risk management, single-part credit limits, stress testing requirements, a debt-to-ratio limit and calls for early remediation requirements to be established for these entities.

The FRB’s enhanced prudential standards proposal is one of the cornerstones of the Dodd-Frank Act designed to end “too-big-to-fail” institutions and reduce risk to financial stability in the U.S.  It, along with more than 200 new rules proposed by other federal banking regulators, has and will continue to bring about sweeping changes to the financial services industry.

To discuss these changes and what they mean for the financial services industry, CSBS Examiner interviewed Michael Stevens – Senior Executive Vice President of CSBS – and Jeff Allen – CSBS Senior Manager of Policy Development – for their analysis on implementation of financial reform, what these changes mean for the industry in the long term, and where we go from here.

In Part I of the Q&A, staff analyze the FRB’s Prudential Standards proposal, what it means for large banks, and how it works in concert with other aspects of the Dodd-Frank Act.  Part I of the Q&A is available here

In Part II of the Q&A, staff discuss the Dodd-Frank Act and the future of financial regulation.  Part II of the Q&A is available here.   

Around the Agencies

FDIC:  FDIC General Counsel Michael H. Krimminger announced that he will be leaving the agency later this month to join the law firm of Cleary Gottlieb Steen & Hamilton as a partner in its Washington, D.C. office.  He was appointed Acting General Counsel in November 2010 and as General Counsel in February 2011 by former FDIC Chairman Sheila C. Bair.  Read more.

FHFA:  Federal Housing Finance Agency (FHFA) Acting Director Edward J. DeMarco released for public comment the agency’s draft Strategic Plan: Fiscal Years 2013- 2017.  FHFA is updating its plan in order to incorporate the strategic plan for the conservatorships of Fannie Mae and Freddie Mac sent to Congress in February 2012.  In accordance with the Government Performance and Results Modernization Act of 2010, FHFA is soliciting the views of those potentially affected by, or interested in, the plan.  Read more.

FINRA:  The Financial Industry Regulatory Authority (FINRA) announced that it has added new features to BrokerCheck to help users more easily access broker-dealer and investment adviser registration information.  BrokerCheck is a free tool to help investors research the professional backgrounds of current and former FINRA-registered brokerage firms and brokers, as well as investment adviser firms and representatives.  Read more.

FRB:  The Federal Open Market Committee (FOMC) on Wednesday announced a revised tentative meeting schedule for 2012 and a tentative meeting schedule for 2013.  In order to provide ample time for the Committee's usual discussions, these meetings have been scheduled to take place over two days.  In addition, the FOMC announced that, going forward, the presentation of the Summary of Economic Projections and the Chairman's press conference will occur in conjunction with the meetings scheduled for the third month of each quarter.  Read more.

FRB:  The Federal Reserve Board and the FOMC on Wednesday released minutes of the committee’s April 24-25 meeting showing that several Federal Reserve policymakers thought the U.S. central bank might need to do more to support the economy if the recovery stumbles.  The minutes suggested officials were inclined to stay their current course, given a "moderately" expanding economy and improved labor market conditions.  Read more.

HUD:  The U.S. Department of Housing and Urban Development (HUD) released two reports on the impact HUD-approved housing counseling has for those families who purchase their first homes and those struggling to prevent foreclosure.  In both studies, HUD found housing counseling significantly improved the likelihood homeowners remained in their homes.  “These two studies underscore the need to continue supporting housing counseling programs across this country, especially during this period when families need these services the most,” said Raphael Bostic, HUD’s Assistant Secretary for Policy Development and Research.  Read more.

Around D.C.

FREDDIE MAC:  In the first quarter of 2012, fixed-rate loans accounted for more than 95 percent of refinance loans, based on the Freddie Mac Quarterly Product Transition Report released this week.  Refinancing borrowers preferred fixed-rate loans, regardless of whether their original loan was an adjustable-rate mortgage or a fixed-rate. Read more.

Upcoming Events

May 22:  The Senate Banking Committee will hold a hearing titled, “Implementing Derivatives Reform: Reducing Systemic Risk and Improving Market Oversight,” at 10:00 a.m.  Read more.   

May 31:  The National Journal is hosting Compare the Candidates: An Analysis of the Issues Defining the 2012 Presidential Election at the Newseum in Washington, D.C. at 8 am.  The two presidential nominees sharply diverge on key policy issues such as the economy, workplace policy and foreign policy.  The event will examine this clash of policy ideas, each candidate’s vision for America, and a broad range of public policy issues destined to define the 2012 general election cycle.  Read more.

Closing Comment

“The state of Tennessee is made up of over a 150 community banks.  They all do a great job in serving their communities and it’s important that regulators do what we can do to put those institutions in as good of a position as possible to continue serving.”

– Greg Gonzales, Commissioner of the Tennessee Department of Financial Institutions in a May 15 article in the Johnson City Press.

Catherine Woody, Editor
Rockhelle Johnson, Writer
Edward Smith, Contributing Editor

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