Insights From Recent OCC Meeting

November 19, 2014

Amber Van Til, who leads IBA’s government relation team, and I had the privilege last week to attend a meeting in Chicago hosted by the Office of the Comptroller of the Currency (OCC) for bank trade association staff of the central division. Under the leadership of Bert Otto, deputy comptroller of the Central District, the OCC for many years has been reaching out to the industry through its trade associations. These meetings offer candid discussions of the issues faced by both the regulatory community and the financial institutions that they regulate. The conversations go a long way toward making bank examinations more efficient and meaningful to both parties.

While both parties would agree that, at times, these meetings have become a bit acrimonious, at this meeting both sides came away with steps to take to smooth out the process. One topic that prompted lively discussion was the examination of third-party service providers by the OCC and other prudential regulators. To the extent that these third-party relationships, such as core data processers, are critical to the bank, the bank is required to perform and provide to its examination team evidence that adequate due diligence has been and continues to be performed on an ongoing basis. We learned, though, that while the OCC performs examinations of these third-party entities, it may report its findings only to current users. What about a bank that is looking at a data processing company that the OCC has found deficiencies with? OCC cannot contact that bank and disclose the results of its findings. The prudent action of the bank, then, is to contact its primary regulator and discuss the change in relationship it is contemplating. While the primary regulator may not disclose its findings, if it suggests more due diligence, the bank definitely should do more due diligence. Certainly the bank would want to visit with current clients to determine the adequacy of the third-party provider.

One of the OCC representatives present was Carrie Moore, director of congressional liaison. A veteran of Washington, D.C., Carrie was forthcoming about the issues that OCC has flagged as needing immediate attention to help community banks. While the list is not exhaustive, bear in mind that, as a government agency, OCC responds to inquiries, rather than initiates ideas for legislation. Carrie listed three issues that OCC anticipates will draw attention early in the next Congress: (1) provide higher cap for an elongated examination schedule for highly rated banks of less than $750 million in assets; (2) exempt from the Volcker Rule all banks with less than $10 billion in assets; and (3) provide to thrift-chartered institutions the same powers that national banks currently have. The banking industry has a long list of regulatory cleanup to pursue in the next Congressional session, and it is encouraging that OCC is in agreement on most of those items.

Bert Otto has been a friend for the many years that our careers have overlapped. He has 42 years of experience with the OCC, has led the Chicago office for over 15 years and will be retiring at year-end. Phil Gerbick, who serves as senior thrift adviser for the OCC Central District, also will be retiring at the end of the year, after more than 40 years of service to OCC and thrift regulators. I thank these two gentlemen for their lengthy service to the banking industry, and I wish them well in this new phase of life.

- S. Joe DeHaven

Preserving the Community Banking Legacy

November 12, 2014

Many times over the years, I have written and spoken about my deep concern for the future of community banking. My concern is actually aimed more at the rural communities that so many of those banks serve. I fear that, without community banks, many rural communities will not survive. Clearly a certain portion of our population prefers to live in those communities, but will lose that option if their communities cease to exist.

Although I have addressed this topic many times, last Friday my good friend John Ryan, president and CEO of the Conference of State Bank Supervisors, stated it best when speaking before a community bank conference at the Federal Reserve. John simply said: “The future of community banking is not just about the future of community banks, but the ability of communities to define their future, the future of rural America, the future of small businesses across our country, and the future of individual choice.” Well said!

Considering the excessive regulatory burden that has been cast upon the banking industry within the past four years, particularly on the community banking industry, it is uncertain how many will survive. U.S. Senate leaders, for the past couple of years, have failed to consider any regulatory relief measures. Surely they do not think the Dodd-Frank Act (DFA) is so perfect that it requires no adjustments, yet that is exactly how they have acted.

I am hopeful that all of that changed last Tuesday, Election Day. The people spoke and replaced a significant number of Democrat senators, while not rejecting a single Republican senator, resulting in a Republican majority in the Senate for the first time in eight years. I assure you that the Republican majority members will make their share of mistakes, but I also believe they will be open to making needed tweaks to certain DFA provisions – those that are the most unfair, unnecessary and poorly drafted. With this revamped Senate working with the U.S. House of Representatives, which also remains significantly controlled by Republicans, I fully expect many regulatory relief bills to be passed and placed on President Obama’s desk. The question is, will the president sign them into law, or veto them?

This scenario surely inspired John Ryan’s remarks last Friday. He must feel encouraged that Congress will finally deal with some of the egregious Dodd-Frank Act rules that have been drafted in the past four years. John also has to be encouraged that community banking, as we know it, has a chance to survive. Consequently rural communities and small businesses, which are so dependent on community banks, likewise have a chance at survival. If all those factors play out, then the individual choice of where to raise a family will be preserved to include the option of a rural upbringing.

Thank you, John, for your leadership on behalf of community banks, small communities and freedom of choice. Thank you, voters, for creating an atmosphere that, we hope, will diminish partisan gridlock and move this country forward, at least regarding the current regulatory burden. As John so aptly closed his speech: “We have inherited an important legacy: a diverse banking system. I believe that by all of us working together, we can ensure its future.” May the legacy live on!

 - S. Joe DeHaven

FLD Bridging Bankers, Building Leaders Event

November 5, 2014

Last week the Indiana Bankers Association and its Future Leadership Division (FLD) held the second annual “Bridging Bankers, Building Leaders” conference. Attendee evaluations indicate that there is a great value to this event, designed for emerging bank leaders. IBA and FLD planners assembled an impressive list of speakers and panelists to discuss issues of relevance to the young bankers in attendance. While those speakers were outstanding, the opportunity to network with similarly situated banking peers from throughout Indiana may have been the key takeaway for participants.

Once again, I was struck by the intelligence and fundamental understanding of the business of banking displayed by these bright young people who attended. In the past, I admit that I have bemoaned what I misperceived as a lack of interest and skill among many young bankers. No longer do I harbor that concern. With programming such as this FLD conference, graduate schools of banking, our leadership development programs and overall attendance at a variety of skill-specific seminars, I have had the opportunity to meet many bright, energetic and engaged young bankers.

Part of my concern had centered on circumstances that, for many years, combined to create a vacuum of young talent. In 1980 Congress deregulated interest rates that could be paid on various deposit accounts. This artificial control of deposit rates also tended to artificially control loan rates. When deregulation occurred, prime rates ballooned to over 20 percent per year. Adding insult to injury, the 1986 Tax Reform Act devalued certain real estate property by about 20 percent. This series of unfortunate events, combined with the interest-rate deregulation which did not fairly allow for any protection of existing fixed-rate real estate loans, teed up the so-called savings-and-loan crisis.

Another ill effect of this bad combination of political decisions was that banks discontinued hiring young people for management training programs for nearly 15 years. As a result, there were virtually no young people entering banking for several years. Today, however, that trend has changed. Young professionals are being attracted to the business of banking – and banking surely needs to continue to attract them. The business of banking is changing so rapidly that the baby-boom generation, which currently leads most banks, simply does not have the necessary background to deal with some of the new issues. This is particularly true in the areas of technology and, to a lesser extent, the new regulatory environment.

Many of these newcomers to the business of banking are digital natives, and we welcome them with open arms. New product-and-service delivery systems, particularly mobile technology, require their expertise. The new regulatory world for these young folks is all they have ever known, so they waste no time pining over bygone days. Boomers, on the other hand, remember a much simpler time; for them, adjusting to this new world can be frustrating.

All of the above means that an influx of bright, young professionals is needed to carry banking into the future. Contrary to popular opinion, these newer bankers do not expect to be named president of the bank anytime soon. They do, however, expect to be appreciated for the contributions they make and to be given the opportunity to learn and contribute. With these common-sense aspirations, they are not really all that different from the baby boomers that they will eventually replace. I seem to recall, early in my career, that I also wanted the knowledge to assume responsibility and a fair chance at advancement. Not much has changed!

Thank you to those who participated in the FLD Bridging Bankers, Building Leaders event. It was a wonderful opportunity for attendees to grow and to learn about banking. And for me, it was a chance to observe the next generation of bank leaders. I am confident that our future is bright.

- S. Joe DeHaven

A Critical Election Day Approaches

October 29, 2014

Next Tuesday, Nov. 4, is an important election day for the future of our country, a day of historic determination. Control of the U.S. Senate will be determined for the next two years and, probably, for several years thereafter. It currently is controlled by Democrats, but is now up for grabs. By contrast, the U.S. House of Representatives is controlled by Republicans, who will continue to control it, according to political pundits. The future of the Senate is critical, from a banking standpoint. As a whole, the Democrats currently serving have not shown a willingness to forward regulatory relief that might help banks better serve their customers. They seem to have adopted the Dodd-Frank Act as inviolable.

Consider the evidence. Only three regulatory relief bills have been passed out of the Senate Committee on Banking, Housing & Urban Affairs in this legislative session, which is now nearly two years old. Yet the House Committee on Financial Services has passed over 25 bills dealing with various aspects of regulatory relief. Because of this reform record, banker groups across the nation are largely supporting Republicans in federal races this election year.

While there are about 10 elections across the nation that will determine Senate control, most pundits peg the races in Iowa and Colorado as the two most decisive. In addition to the aforementioned banking issues, these two races bring forth yet another battle of industry adversaries — banks versus credit unions. In Colorado, Sen. Mark Udall has been the darling of the credit union industry, authoring and promoting numerous bills on behalf of credit unions. In appreciation, last week the associations that represent credit unions contributed $400,000 to his re-election effort. His challenger, Congressman Cory Gardner, is not a supporter of credit union expansion, and he does support regulatory relief for banks and other businesses. Mr. Gardner has been singled out for support from the Friends of Traditional Banking (FOTB). It is impossible to determine how much financial support FOTB might ultimately provide to him, but this organization selects only two races each election.

In Iowa, the race is for an open seat that has previously been held by a Democrat. The candidates are Democrat Bill Braley, currently a member of the U.S. House of Representatives, who has been a friend to credit unions for many years. His opponent, Joni Ernst, who retired after 22 years of military service, shares the same philosophies as Cory Gardner. Ms. Ernst is the other candidate that FOTB is supporting.

Both of these races will be closely watched throughout election night as harbingers of who will control the Senate. Banking lobbyists and supporters will be keenly honed in on these two races, hoping both for regulatory relief and for constraints on further credit union powers expansion. Few times in my career has an election so crystallized issues of interest to bankers. I know that I will be watching to see how the balance of power will be determined by voters — just as the framers of the Constitution envisioned.

- S.  Joe DeHaven

Five Major Banking Changes in Past Years

October 22, 2014

Last week I turned 65 years old. It is hard to believe that I’ve reached this milestone, as it seems like just a few years ago that I was in high school. But the calendar does not lie. Another approaching milestone is that I have been associated with the banking business for nearly 45 years. That, too, does not seem possible, as it couldn’t have been that long ago that I began working in a bank as a college student. But the calendar does not lie.

During these 45 years, the business of banking has changed immensely, mostly within five prevalent areas. The first area is technology, particularly customer delivery channels. When I started in banking, customers came to the bank, or handled a limited number of services over the telephone. Today banking services are accessible by ATM, telephone, Internet, mobile and tablet … with far fewer people actually coming to the bank. This trend will continue to change the banking model significantly.

Second, the proliferation of regulations cast upon the banking industry is unfathomable. With over 100,000 pages of federal law to comply with, is it any wonder that banks struggle to know every rule in place? This plight drives many banks to sell, rather than continue to hire more and more non-income-producing employees. This issue is, and will continue to be, much more of a burden on rural communities. Banks are central to economic growth and, if the only bank in town sells, who fills the void to attract new jobs?

This leads to the third trend: bank consolidation. Nationwide there were around 20,000 bank and thrift charters 30 years ago. Today there are about 6,500. Granted, there are more branches today than three decades ago, but that, too, is changing. Since 2010, the total number of branches has declined, and those branches that remain are evolving. The branches that continue into the future will be less transactional and more focused on sales and providing financial advice. Consolidation is far from over, and the unique financial delivery system of the United States will be changed forever.

The fourth change has been the proliferation of unfair competition. Many companies that do not bear the same regulatory burden as banks are entering the financial services arena. This is like a boxing match, with one contestant’s arm tied behind his back. It is just not fair. Other competitors, such as credit unions and Farm Credit System banks, remain exempt from taxation on all or most of their income, yet banks on average pay nearly 40 percent of their net profit to taxes. How is it equitable for tax-advantaged entities to be selling the same services?

Finally, the image of banking has slipped within the past few years from the highest levels of respect to the lowest rungs of distrust – fallout from the financial crisis due to the missteps of a few. In contrast to the misdeeds of some organizations mistakenly lumped in with banks, traditional depository banks did not engage in risky behavior. As a result, the bankers that I know continue to provide the same high-caliber banking services to their communities that they always have. Nevertheless, all banks have suffered image erosion from those who did not adhere to time-tested banking principles.

These five areas have changed banking monumentally during my banking career. I hope that, within the next 45 years, the industry continues to find efficient channels to serve customers. I hope that bankers are able to continue to serve consumers in rural areas. I hope that our legislative leaders come to their senses and recognize that competitors providing the same products should be treated equally under the law. And I hope that banks and bankers soon regain the pristine image that they have worked so hard to earn.

-S. Joe DeHaven

TLAC – Yet Another Pricey Requirement

October 15, 2014

Federal Reserve Gov. Daniel K. Tarullo indicated last week that the Federal Reserve intends to introduce a proposed capital requirement that would be more stringent than requirements contemplated by the Basel III agreement. Tarullo indicated that the proposed requirement, Total Loss Absorbing Capital (TLAC), will “probably be a little bit more rigorous with respect to some of the qualifying instruments.”

The goal is to diminish the probability of future taxpayer bailouts. TLAC would require that banks maintain minimum amounts of long-term debt that could absorb losses and/or be converted into equity, if required, to keep the bank subsidiary solvent during the period that regulators are winding down the holding company. This appears to be an extension of the Federal Reserve viewpoint that Basel III is a floor and not a ceiling on capital requirements for internationally active financial institutions. Although Tarullo said that “in general what we will be doing is paralleling each of these major international frameworks with our own domestic implementation,” he further suggested that the Fed’s proposal to go above the Basel III guidelines “serves as a bit of an opportunity for other countries to think about what they will do.” Additionally he indicated that U.S. regulators intend to impose tougher rules on capital surcharges for the big banks that have been designated as systemically important financial institutions.

I find this worrisome on a couple of levels, even though I appreciate Gov. Tarullo’s goal of diminishing or eliminating the probability of future taxpayer bailouts. First, why do we want to issue rules on our largest banks that make them less competitive in the world marketplace? The Federal Reserve certainly had a seat at the table when the Basel III rules were agreed to. Those rules were intended to level the global playing field, so that all banks in the world would be equal relative to capital requirements. Why, then, is the Federal Reserve now proposing that the United States be more restrictive?

Second, while this requirement is pointed at the largest banks, history shows that what is imposed on the largest banks eventually filters down to all U.S. banks. A recent example was the stress testing, implemented less than five years ago, that was to apply only to the 19 largest U.S. banks. Now elements of stress testing are being imposed on even the smallest of community banks, to the extent that the Indiana Bankers Association has hosted educational seminars on stress testing. How long, then, before the TLAC capital requirements, intended exclusively for systemically important financial institutions, will be imposed on all banks?

As I have often voiced, it seems that there is an effort coming from Washington, D.C., to destroy the bifurcated financial services system that is unique to the United States. Our system of international banks, national banks, regional banks and local community banks is the envy of the world. It has made us the most powerful economic engine ever on earth. Should we not be preserving and promoting this successful system?

While Tarullo’s goal may be worthy, the proposal comes at the price of making our biggest banks noncompetitive on a worldwide basis and of potentially adding yet another log to the fire that is burning up so many community banks. That price, I fear, is far too high to pay.

- S. Joe DeHaven

Annual Convention: What’s Your Game Plan?

October 8, 2014

Last week the Indiana Bankers Association hosted its Annual Convention in beautiful French Lick. Over 500 bankers, service providers and guests came together for this successful event, themed “What’s Your Game Plan?” The convention is designed specifically to facilitate opportunities for attendees to network, explore the exhibit hall for innovative products and services, and learn about new ideas or products from the outstanding speakers who made presentations.

The meeting was virtually the “who’s who” of the Indiana banking scene. Bankers in attendance benefited from the insights of Board Vice Chairman of the Independent Community Bankers of America Jack Hartings, who also is president and CEO of The Peoples Bank Company, Coldwater, Ohio, and Board Vice Chairman of the American Bankers Association Dan Blanton, who additionally serves as CEO of Georgia Bank & Trust, Augusta, Georgia, who brought the latest news on their respective organizations to the attendees. The audience had no shortage of questions for both of them, covering everything from cybersecurity issues to credit union taxation to regulatory burden and more. These polished gentlemen certainly represented their national organizations well.

While there were several professional speakers who regularly travel the banking circuit, there were a couple of unique presentations. First was a presentation by Eric Doden, president of the Indiana Economic Development Corp., who introduced research regarding establishing regional cities throughout Indiana, primarily to accomplish economic development that benefits wider areas than current city/county efforts being used. Mr. Doden explained how the research was conducted and highlighted some interesting results. The study, which was recommended by Gov. Mike Pence and approved by the 2014 session of the Indiana General Assembly, was due last week on Oct. 1. Eric’s presentation to the IBA convention delegates certainly was timely, since it was delivered on Sept. 29!

The other unique presentation was by Dr. Ruby Payne, founder and owner of aha Process!, a company which produces research and support material in Dr. Payne’s committed effort to reverse the increasing trend of generational poverty. Her spellbinding presentation was the talk of the convention. Who better to understand the devastating results of poverty, not only on those experiencing it, but to the community at large, than banking professionals? Ruby’s research over many years includes projections that show the multiplier effect of the growing reach of generational poverty. The thrust of her presentation, however, is that there is hope through her Bridges Out of Poverty program, designed to reverse this trend. The program already is being utilized to some degree in some Hoosier communities, with a couple of Indiana banks providing instrumental support. Following Ruby’s presentation, she sat on a panel presentation, along with Home Bank, Martinsville, President and CEO Dan Moore and COO Lisa Arnold, as well as community representatives who have been working with the program. The insights presented were inspiring. IBA is working with Ruby Payne and her team to develop a banker initiated and led effort to establish her program throughout the state.

Current IBA Chairman Dave Heeter, CEO of MutualBank, Muncie, was appropriately recognized for his successful year, and he spoke eloquently about the importance and success of IBA. Chairman-elect Larry Myers, president and CEO of First Savings Bank, FSB, Clarksville, spoke with passion about his goals for the coming year. There is little doubt that Mr. Myers will continue the lengthy string of outstanding IBA leaders. IBA appreciates and thanks all who participated in the 2014 Annual Convention, and we look forward to even more success in 2015.

- S. Joe DeHaven


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