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How do the Bank Regulators View the Federal Home Loan Banks?

Jerry Blanchard recently spoke to the national sales meeting of the Federal Home Loan Banks on the topic of How the Regulators View the FHLB’s.

The FHLB system has been a major source of liquidity to its over 8,000 members during the financial crisis and faces many challenges as the system deals with:

  • shrinking demand for loan advances;
  • losses incurred in mortgage backed securities that have led to a number of the FHLB’s having to enter into Consent Orders with  their primary regulator; and
  • greater Congressional scrutiny of all government sponsored entities.

Banking regulators deal with the consequences of FHLB policies and actions when financial institutions are taken into receivership. In some instances, the availability of FHLB advances may have led to some banks to incurring more risk than they would  have otherwise  incurred.

Jerry’s presentation addressed how the banking regulators view the role of the FHLB ‘s and how those views might affect bank examinations in the future.  If you would like more information, a copy of Jerry’s FHLB presentation is available online, or reach out to Jerry Blanchard to discuss further.

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Senate Acknowledges Banking Regulators Are Sending Mixed Messages

The Senate has acknowledged that the federal banking regulators are sending mixed messages to community banks… but they don’t plan to do anything about it.   Section 4113 of the bill to authorize the Small Business Lending Fund adopted by the Senate on September 16, 2010 includes a declaration of Congress regarding the messages being sent by the federal banking regulators.

Sec. 4113. Sense of Congress

It is the sense of Congress that the Federal Deposit Insurance Corporation and other bank regulators are sending mixed messages to banks regarding regulatory capital requirements and lending standards, which is a contributing cause of decreased small business lending and increased regulatory uncertainty at community banks.

Apparently, the Senate doesn’t have any issues with the regulators’ actions, since the bill neither states that Congress believes the regulators are wrong for sending these mixed messages nor includes any requirement that they stop doing so. One might suggest that the regulators are not sending mixed messages… but are sending different messages depending on the audience; the regulators are telling Congress they want banks to lend, while imposing burdens on banks that make new lending practically impossible.

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Boards and Strategic Planning in a Challenging Environment

Short-Term Planning for Recovery and Survival

(This post was authored by Walt Moeling and Dustin Hall.  A version of this post originally appeared in the August 2009 issue of the ABA’s Community Banker magazine.)

The grim economic prognoses we continue to hear about have an immediate impact in the bank board room. Boards must think about short-term planning for recovery and survival because virtually no bank is wholly immune from the current recession.  Although the problems may have started with residential real estate in the Sunbelt, they have gone much beyond that now, impacting banks throughout the country.

As a director you must plan for both long-term and short-term.  Long-term planning is tremendously important, and we hope to make it to the “long-term,” but short-term planning is critical today.

Short-term planning in this context deals with the reality of today’s marketplace.  The focus is not on earnings or even stock value, two traditional focal points for planning.  Instead, the focus is on capital management, liquidity, and asset quality.

Capital Management

Your short-term capital planning in the face of mounting losses cannot focus on today or yesterday; it must focus on tomorrow.  You must ask: Where are we going?  What will happen if housing prices drop for another two and a half years, as predicted by some?  Can our borrowers sustain a more prolonged recession?  If not, where will our capital be three, six, and nine months from now?  In essence, you must stress test your bank to see how far it can go.

A real problem for directors is assuming that capital today is as readily available as it has been for the past 15 years, or that they can sell the bank if there is a real problem.  Unfortunately, there is no public market, and virtually no private equity, for bank stock.  Those sources are presently closed, shall we say, for repair.  Instead, short-term capital is likely to be found only within the boardroom and from family and friends.

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Obama Proposes Comprehensive Regulatory Reform

On June 17, 2009, the Obama administration publicly announced its vision of regulatory reform.  Among the key points for community banks and thrifts:

  • Combine the Office of the Comptroller of the Currency (OCC) and Office of Thrift Supervision (OTS) into a new federal agency, the National Bank Supervisor, which would remain an office of the Treasury Department.  The National Bank Supervisor would have all the powers of the OCC and the OTS.  The Federal Reserve and FDIC would retain their respective roles with respect to state banks.
  • Eliminate the federal thrift charter, subject to “reasonable” transition arrangements.
  • Eliminate restrictions on interstate branching by national and state banks.  States would not be allowed to prevent de novo branching into the state, or to impose a minimum age requirement of in-state banks that can be acquired by an out-of-state banking firm.
  • Thrift holding companies and Industrial Loan Company (ILC) holding companies would both be required to become Bank Holding Companies supervised by the Federal Reserve.
  • Create a new federal Consumer Financial Protection Agency (CFPA).  The CFPA is proposed to have sole authority to promulgate and interpret regulations under existing consumer financial services and fair lending statutes, including TILA, HOEPA, RESPA, CRA, and HMDA.  The CFPA is also proposed to assume from the federal prudential regulators all responsibilities for the supervision, examination and enforcement of consumer financial protection regulations.
  • States would have the authority to adopt and enforce stricter laws, and federally chartered institutions would be subject to nondiscriminatory state consumer protection and civil rights laws to the same extent as other financial institutions.

As a reminder, we are the very beginning of regulatory reform; the final reforms are undoubtedly not going to be exactly as laid out in the President’s current proposal.

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Commentary: Tightening of TARP Capital Standards

Conversations with each of the federal banking regulators over the last several days confirm what we have heard elsewhere: the distribution of TARP Capital that started out with a more liberal bias has now turned more conservative.  Regulators have recently indicated that institutions with a CAMELS rating of 1 and 2 are almost certainly likely to receive an investment, while 3-rated institutions are now described as “perhaps” receiving an investment.  4 and 5-rated banks are unlikely to receive any TARP Capital, absent unique circumstances.  (Just a few weeks ago, these same regulators were telling us that a 3-rated institution would be treated more like a 2-rated institution, and that 4-rated institutions would “perhaps” receive an investment.)  This shift is certainly an outgrowth of Treasury’s position that the main test of which institutions will receive capital investments is assured long term viability.

What does this mean for the thousands of banks that will not receive funding?  They certainly need to be considering a public relations initiative to manage or preempt the questions that will come at them from shareholders and the local media.  Perhaps the conversation could be along the following lines: “(i) the banking industry did not ask for this plan (which has changed dramatically since it was first proposed); (ii) an investment by the Treasury in a bank is not an automatic guarantee that a particular bank will be successful and neither is a decision not to invest some sort of condemnation; (iii) our loan portfolio reflects our community and the real estate lending which helped our community grow is suffering; and (iv) we are here for the long run and look forward to meeting the credit needs of our customers for years to come.  Together we will both survive the current economic challenges.”

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