Regulators Keep Close Watch as Banks Scout for New Revenue

LAS VEGAS — Regulators, content with how community banks have handled credit problems, are expected to focus more on how bankers are managing risk as they scout out ways to boost revenue.

At a panel Tuesday hosted by the Independent Community Bankers of America called "Regulatory Hot Stuff," regulators expressed concerns about smaller banks moving into unfamiliar businesses.

"Banks are feeling pretty good right now; they are out of the crisis," Bert Otto, deputy comptroller for the central district in the Office of the Comptroller of the Currency, told a packed room of bankers. "But we still need to make sure you have good corporate governance and credit underwriting."

The Federal Deposit Insurance Corp. is looking at whether banks have the right people, policies and procedures in place before entering a new business line, Doreen Eberley, the agency's director of risk management, said. In particular, banks must consider a variety of risks before they work with third-party vendors, she added.

Concerns over third-party vendor relationships also surfaced during a second panel discussion that covered compliance. Many community banks are using vendors without conducting proper due diligence, Sylvia Plunkett, a senior deputy director of compliance and Community Reinvestment Act examinations and enforcement at the FDIC, said in the discussion called "Compliance Hot Stuff."

It would be ill-advised for banks to just turn over a new product to an outside firm. They should be aware of how the provider is communicating with consumers and what it is charging for its products and services, Plunkett said. "If you are going to have a third-party vendor provide a product to the consumer, make sure you understand the product and how it is being offered," she said.

The Federal Reserve Board wants to make sure that banks have the right risk management structures in place for new businesses, Kevin Bertsch, an associate director of banking supervision and regulation division at the Fed, said during the regulatory panel. He urged bankers to have conversations with regulators before pursuing a new line of business.

Intense competition for loans may be prompting more banks to loosen their underwriting criteria. Interest rate risk is another concern for regulators. Though interest rates have stayed extremely low for a long of time, they will eventually rise, and banks need to be prepared, Eberley said.

Banks have "spent a lot of time getting things right in the credit area, working through problems, rewriting loans and working through" foreclosed assets, Bertsch said. "Now that we've got that straight, we want to make sure we go back and look at these larger features like interest rate risk and put some attention back on basic blocking and tackling."

The panelists also fielded questions on a variety of topics that included the proposed Basel III guidelines and capital standards. "We have received more than 2,000 comments, many of those came from community bankers that made very specific observations on parts of Basel III that they found problematic," Bertsch said.

It's no secret that bankers are nervous about the current regulatory environment, and that frustration bubbled over at times during the regulatory panel. Attendees asked questions with critical undertones, at some points drawing applause from their peers.

"Even those of you who are well capitalized right now … none of you are immune from that capital buffer from driving you out of business," one banker warned. He was referring to the Basel III proposal for a capital conservation buffer of 2.5% meant to help banks withstand future periods of stress. This would increase the total common equity requirement from 4.5% to 7%.

"It is not fair to community banks," the banker said, adding that he was among the 2,000 people who provided a comment to the Fed but had not received a response. "The bulk of banks that went through problems did not have capital problems."

Another attendee challenged panelists to give more guidance on stress testing. "Why don't the [FDIC and the Fed] share with the banks a stress testing tool kit so that we can provide what the regulators want?" Her question came after a discussion of the stress testing tool kit that the OCC provides to community banks.

The Fed doesn't want to impose a "one size fits all" model to smaller banks, Bertsch said. "We recognize that you and your banks have a much better understanding of your portfolio," he said.

Overall, panelists took the questions stoically.

Still, Eberley cracked a smile and unintentionally drew laughs from the crowd for her response to a question on how community banks can balance making money and taking on more risk. "It's a challenging operating environment right now and we can't tell institutions what to do," she said.