Hot Topics in Banking Regulation

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Hot Topics in Banking Regulation
Susan ZubradtVice President
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Hot Topics

• Federal Reserve Regulatory Relief Efforts
• Call Report Updates
• Standardized Terminology
• Liquidity
• Top IT Supervision Issues
• Capital Adequacy Framework

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Federal Reserve Regulatory Relief Efforts

• Federal Reserve System
• Size increase for Small BHC Policy Statement
• Support for portions of Congress reg relief
  legislation
• Allow institutions to pay interest on demand
  deposits
• Provide small bank examination flexibility
• Amend flood insurance requirements
• Repeal CRA sunshine requirements
• Reserve Bank
• Streamline examination processes
• Provide advisory visits
• Conduct outreach programs

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Federal Reserve Regulatory Relief Efforts
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Revisions to Small BHC Policy Statement

• Small BHC asset threshold increasing from 150
  million to 500 million
• Subordinated debt associated with Trust Preferred
  Securities (TPS) to be considered debt, subject
  to a transition period
• TPS considered debt for determining down payment
  requirements and ability to pay dividends
• TPS not considered debt for determining
  compliance with 12-year debt reduction and
  25-year debt repayment requirements
• Final Rule issued 2/27/06 Effective 3/30/06

Federal Reserve Bank of Kansas CitySupervision
and Risk Management
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Revisions to Small BHC Policy Statement
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Call Report UpdatesMarch 31, 2006

• Removed
• Customers liability to the bank on acceptances
  outstanding RC-9
• Banks liability on acceptances executed and
  outstanding RC-18
• Impact on income of derivatives held for purposes
  other than trading RI-Memo 9
• Participations in acceptances conveyed to others
  by the reporting bank RC-L5

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Call Report UpdatesMarch 31, 2006

• Added
• Life insurance assets RC-F5
• Credit Derivatives Notional Amounts RC-L7
• Foreclosed properties from GNMA loans as a
  subgroup of OREO RC-M3
• Credit Derivative Contracts RC-R Memo 2
• Changed
• Asset Backed Securities RC-B5 and RC-B Memo

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Standardized Terminology

• Clear and consistent communication is critical.
  To be effective, these communications should be
• Written in clear, unambiguous language
• Prioritized and focused on significant matters
  that require attention
• Clear regarding what action must be taken
  directly by the board vs. action for which the
  board will be held accountable regardless of the
  party to whom the board may delegate such action

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Standardized Terminology

• What is our New Terminology?
• Categorizes matters requiring attention into
  three groups
• Required Actions
• Expected Actions
• Observations

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Standardized Terminology

• Required Actions
• Constitute the highest priority supervisory
  matters
• Will specify the timeframe in which the action
  must be completed, which is generally short, and
  may be immediate
• Board or management is required to respond in
  writing regarding corrective action taken or
  planned with corresponding timeframes

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Standardized Terminology

• Expected Actions
• Constitute a lesser priority than Required
  Actions, but nonetheless must be addressed over
  time to prevent the emergence of a significant
  issue
• Board or management should provide a written
  response regarding the plan for, progress and/or
  achievement of the Expected Action

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Standardized Terminology

• Observations
• Constitute examiner insights about sound industry
  practices which could make the organization more
  effective or efficient
• No time frames required for response
• Board or management response not required

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Liquidity and Bank Funding
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Examination Liquidity Ratings

• Key Components Considered by Examiners
• Quantitative Factors
• Ratio Analysis (Liquidity, Asset Composition,
  Noncore Funding)
• Asset Liquidity (Unpledged liquid Assets, FFS)
• Dependence on Noncore Funding Sources (FHLB, FFP,
  etc.)
• Qualitative Factors
• Favorability of Funding Terms
• Source and Sustainability of Asset Growth
• Management Information and Reporting Mechanisms
• Corporate Governance/Risk Oversight

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Top IT Supervision Issues

• During 2005, the Reserve Bank began assigning
  and disclosing a composite URSIT rating for
  serviced banks
• Increased number of 3 rated IT functions
• Inadequate compliance with Information Security
  Standards
• Poor IT oversight and risk management practices
• Poor network management practices
• Poor business continuity planning
• Inadequate IT audit coverage

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Capital Adequacy Framework

• Preliminary interagency proposal to revise
  existing Basel standards
• To bring current standards up-to-date
• Address potential competitive disadvantage from
  Basel II
• Major changes are possible
• More risk weight buckets
• Increase risk-sensitivity for selected asset
  categories
• 1-4 family residential loans
• Acquisition, development and construction loans
• Small business loans
• Loans past due 90 days or on nonaccrual
• Bankers are encouraged to monitor and comment on
  formal proposal changes

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Hot Topics in Banking Regulation
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