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The Economist Frames the Argument Against Excessive Bank Regulation (somewhat unintentionally)

On March 26, 2016, The Economist published an article entitled “The Problem with Profits.” That article discussed the high profitability of U.S. firms and why that seemingly positive fact is actually harmful to the overall economy, mainly because those profits are not being distributed for spending by shareholders or reinvested in business growth. As a result, the economy shrinks as resources flow to these firms and remain on their balance sheets. The focus of the article was a call for increased competition, but we believe we should focus on other conclusions.

While the article gives a tip of the cap to the impact of regulation generally and bank regulation specifically, banks represent the poster child for the negative impacts of limiting the ability of domestic firms to reinvest, an impact that is not directly reflected on balance sheets or income statements.

Since the onset of “new and improved” regulation stemming from Dodd-Frank and other regulatory reforms, we are seeing are clients use their resources to

  • hold capital on their balance sheets, in some cases to protect against the anticipated negative impacts of an imaginary doomsday scenario;
  • retain “high quality liquid assets;”
  • invest in extraordinary compliance expertise and management systems; and
  • fill buckets left empty from reduced interchange fees, the impact of stress testing, and higher costs to originate mortgage loans, among other things.

As an industry, we frequently point to decreased lending to small businesses and increased consolidation as the evils of increased regulation. In our view, however, the dampening of reinvestment initiatives is much more significant for the industry and for the economy in general.

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Georgia Bank Directors: Update Your Financial Statements

Regulation 80-1-6-.03 of the Georgia Department of Banking and Finance requires each director of a Georgia state bank to maintain an annual financial statement in the files of the bank for which he or she serves as a director.  The regulation requires that the financial statement be revised annually and that the financial statement not be more than 18 months old.

In the past, bank examiners have carefully reviewed these financial statements to ensure that estimates of asset values, particularly estimates of the values of bank stock, are reasonable.  Given the volatility of bank stock valuations over the recent years, directors should ensure that their estimates of the value of bank stock in their portfolios are reasonable.  For banks and bank holding companies that have thinly traded securities, estimates should reflect current market conditions as well as the financial condition of the institution.  The latest price at which the securities were sold may or may not reflect those factors.

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Georgia DBF Issues Proposed Rules for Comment

On September 23, 2010, the Georgia Department of Banking and Finance (DBF) published proposed new and amended loan-to-one-borrower and mortgage industry rules to conform DBF rules to statutory changes adopted in the 2010 legislative session.  The DBF invites comments on the rules through October 25, 2010.

The primary rule change affecting community banks is a clarification of the DBF’s interpretation of the exception from the state’s legal lending limit for the renewal and restructuring of maturing loans.

In addition, new definitions would clarify the reach of the DBF’s loan-stacking rule and the limitation applicable to loans to “corporate groups.”  “Control,” “capital,” and “surplus” would track definitions in Regulation O, 12 C.F.R. § 215, and in the context of national banks.  Under the loan-stacking or “common enterprise” concept, loans to separate borrowers are aggregated for purposes of the lending limit in part when there is a relationship between the parties that includes control and financial interdependence.  Loans to corporate groups—corporations and their subsidiaries—are separately capped at 50% of capital and surplus, as defined.

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Federal Bank Regulators Release New Guidance for Management of Interest Rate Risk

On January 7, 2010, the Federal Financial Institutions Examination Council (FFIEC), a collection of federal regulators of financial institutions, issued an advisory on interest rate risk management. This advisory, which was issued as part of an effort to supplement and clarify existing interest rate risk (IRR) guidance provided by individual federal regulators, indicates that federal regulators will have increased expectations during future examinations of a financial institution’s management, modeling, stress testing and documentation of IRR.

In light of the current economic environment in which financial institutions are experiencing downward pressure on capital and earnings, FFIEC has grown concerned with the potential IRR associated with institutions funding longer-term assets with shorter-term liabilities in order to generate earnings. As a result, as part of future federal examinations, IRR assumed by a financial institution will be evaluated relative to the institution’s capital and earnings levels, and management will be evaluated on its efforts to identify, measure, control and document the institution’s IRR.

In particular, FFIEC reiterates its previous position that the ultimate responsibility for the financial institution’s IRR rests with its board of directors; as a result, the board of directors or a specially designated asset/liability committee “should oversee the establishment, approval, implementation, and annual review of IRR management strategies, policies, procedures, and limits.” The board of directors is expected to receive and review regular reports that allow them to accurately assess the IRR sensitivity of the institution to an increasing rate environment and to the important assumptions that underlie management-proposed IRR and liquidity projections. Further, the board of directors is directed to approve comprehensive written policies and procedures in place to monitor and manage IRR continuously. Although the advisory indicates that these processes and systems “should be commensurate with the size and complexity of the institution,” FFIEC indicates that “well-managed institutions” possess IRR management policies that include specific targets under a variety of short and long term scenarios.

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