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Regulatory Exam Tip: Early Intervention

October 14, 2011

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By now, many bankers have experienced the following situation:  you have just left a management exit meeting with regulatory examiners, and you are stunned by the negative conclusions that the examiners have reached.  In the wake of this disappointment, many bankers wait for the examiners to meet with their board and issue the Report of Examination before putting “their side of the story” on the record in a written response to the Report of Examination.

While we always recommend that bankers point out any factual inaccuracies in a Report of Examination via a written response, we believe that bankers may be able to help themselves by presenting additional information before the Report of Examination is issued.  This approach may be particularly helpful if a bank believes its regulatory ratings are being downgraded as a result of inaccurate or incomplete findings by their examiners.  As stated in a recent article by SNL Financial (subscription required):

[Danny Payne, former commissioner of the Texas Department of Savings and Mortgage Lending and now an industry consultant,] said there may be instances where examiners have been overzealous or harsh in their recommendations or findings. “But before the reports are issued, the pre-report communication processes and negotiations between the bank and examiners usually result in a fair ruling,” he said. “By the time issues reach the enforcement order stage, all subjective debates and negotiations typically have been completed and decided.”

We have found that many disagreements with examiners can be resolved through the presentation of additional information.  At the very least, these discussions help bankers gain further understanding of the analysis by examiners.

As we move further into this economic cycle, we are seeing more “borderline” cases where presenting details to examiners can make a difference in the conclusions reached by examiners.  As a result, we encourage bankers to communicate openly with examiners about the condition of their banks.  If you would like to discuss these concepts, please contact any member of our Bryan Cave financial institutions group.

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Regulatory Exam Tip: Write Your Own Exam Report

October 7, 2011

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Over the last few years, we have heard from many of our clients that statements and conclusions in their exam reports are unfair and inaccurate. It is important to understand that regulatory Reports of Examination based upon the data that is given to examiners and the examiners’ interactions with management during the exam process. As a result, we encourage bankers to prepare extensively for regulatory exams by creating presentations that tell the Bank’s story, especially highlighting improvements in the bank’s condition since the time of the most recent regulatory exam or visitation.

While the information in the presentations may seem obvious to bankers, the data reviewed by the examiners may not reveal important and helpful trends in the bank’s condition. For most of our clients, these trends are not obvious when reviewing financial statements and the other information typically provided to the bank’s regulators.

We are happy to share our experiences with approaches that have had a positive influence on the exam process and to refer bankers to resources that may help with preparation for regulatory exams. For more information, please feel free to contact any member of our Bryan Cave financial institutions group.

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Georgia Bank Directors: Update Your Financial Statements

February 1, 2011

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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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New Office of Financial Research Could Require Additional Reporting for All Banks and Bank Holding Companies

June 30, 2010

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As previously discussed, a central item in the new regulatory reform bill is the creation of the Financial Stability Oversight Council to oversee systemically significant financial firms. To assist the council, the bill also creates a new office within the Department of the Treasury known as the Office of Financial Research. The primary purpose of the Office of Financial Research will be to collect and analyze data for the council’s use in its functions.

 While the functions of the Office of Financial Research will certainly lead to enhanced reporting requirements for bank holding companies with $50 billion or more in consolidated assets (as well as the added burden of contributing to the funding of the office), it is reasonable to expect that the office will need additional data from the financial industry as a whole in order to provide context in its analysis of data collected from large financial firms. For that reason, the conference text of the regulatory reform bill allows the office, after consultation with its director and the Financial Stability Oversight Council, to require the submission of periodic or other data from any financial company (which would include banks and bank holding companies of any size) in order to assess “the extent to which a financial activity or financial market in which the financial company participates…poses a threat to the financial stability of the United States.”

 The information the Office of Financial Research will deem important in providing analysis to the council and from which financial companies the office will seek the information remain to be seen. Certain provisions of the bill are designed to minimize duplication in reporting, and, as such, one would hope the additional reporting will be limited to modifications of existing reporting forms. It is clear, however, that its reach extends beyond the large firms that could pose systemic risk to the financial industry.

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Regulatory Reform Creates Powerful Financial Stability Oversight Council

June 29, 2010

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A key political hot button throughout the regulatory reform debate has been the treatment of firms that are viewed as posing systemic risk to the United States financial services industry.  The government assistance provided to some larger firms was a polarizing item to the American public, and there was widespread call for increased oversight of these institutions.

Out of the debate grew the Financial Stability Oversight Council, which is the central body of the conference text of the Financial Stability Act of 2010, a part of the regulatory reform bill.  This council, which will be composed of high ranking officials from various governmental and regulatory authorities, including the Federal Reserve, the OCC, the FDIC, the SEC, and the new Consumer Financial Protection Bureau, will serve as the “new sheriff in town” with respect to large financial institutions (with consolidated assets of $50 billion or more) and other large nonbank financial companies that the council deems necessary to place under regulatory oversight.  The Secretary of the Treasury will serve as Chairperson of the council.

Among the purposes delineated for the council is “to promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such [regulated] companies that the Government will shield them from losses in the event of failure.”  The primary tool to be used by the council in achieving this purpose is placing certain large firms under Federal Reserve supervision.

The Federal Reserve will develop prudential standards to help mitigate the risks presented by these large firms.  The council will make recommendations to the Federal Reserve with respect to the prudential standards.  These recommendations may relate to risk-based capital, leverage, and liquidity, among other things.  In addition, with approval of the council, the Federal Reserve may limit a firm’s ability to expand through mergers and acquisitions, restrict its ability to offer certain products and services, require termination of one or more financial activities or impose conditions on such activities,  and, if deemed necessary, require spin-offs of assets or off-balance sheet items held by a firm.

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