Privacy Regulations Predicted to Be a Top Priority For Banks over Next 10 Years

RMA Journal, The, March, 2001

With the privacy provisions of the Gramm Leach Bliley Act kicking in on July 1, 2001, banks are rearranging their risk priorities to focus on privacy issues. A recent survey, commissioned by RSM MeGladrey, Inc., a national accounting, tax, and consulting-firm serving-financial institutions and mid-sized businesses, shows that the majority of the community banks polled are taking measures to address the privacy issue. However, bank officers surveyed said they have ongoing concerns, mostly procedural, about how to handle the anticipated privacy regulations.

Privacy is quickly overtaking other regulatory risk issues in prominence," said Matt Schriner, RSM McGladrey managing director and consultant to financial institutions. "According to industry buzz, the most important regulatory activity that banks engage in over the next 10 years could be developing and implementing plans and policies to comply with tough federal privacy laws."

When asked what the biggest challenge facing their bank will be when dealing with the new privacy laws, the banks indicated the following:

* Notification, disclosure and communication with customers (27%).

* Paperwork (19%).

* Understanding the requirements of regulation (19%).

* Expenses involved with compliance (14%).

* Time involved with compliance (11%).

* Staff training (11%).

* Waiting to see how state and federal requirements will be implemented (11%).

At 24% of the surveyed banks an officer is assigned to address privacy issues; 22% of the banks reported an internal privacy committee had formed to examine privacy issues.

FFIEC Releases Guidance on Technology Outsourcing

The Federal Financial Institutions Council (FFIEC) issued new guidance in November to help banks manage risk associated with outsourcing technology services. The guidance includes a note of-caution: Although outsourcing can be helpful to banks, "responsibility for managing the risks associated with those products or activities cannot be outsourced." The guidance focuses on the issues of risk assessment, service provider selection, contract, terms and oversight of outsourcing arrangements. The guidance is available on FFIEC's Web-site-at www.ffiec.gov.

More Companies Likely to Use Chapter 11 to Restructure Members of the Turnaround Management Association (TMA) foresee under-performing companies facing more stringent conditions for closing a loan and stricter loan covenants. The result will be more difficulty obtaining refinancing of existing loans and a greater likelihood of loan covenant defaults. In a survey taken in January, TMA members indicated that:

* More companies are likely to violate loan covenants.

* More companies-are likely to seek Chapter 11 protection from creditors.

* More lenders are likely to exert greater influence on the resolution of the troubled companies' situations.

Most did not believe more companies would be forced to liquidate.

More than 4 out of 5 of the random sample of 303 members responding to the TMA Trend Watch in January indicated they are noticing a tightening of credit in existing lenders and in replacement financing. Only about 1 in 4 saw a tightening in debtor-in-possession financing and exit financing from Chapter 11.

"Lenders are becoming more cautions about structuring new debt underwritings that push the envelope on collateral or that are unsecured," said TMA member Ward Mooney, president of Fleet Retail Finance Inc., Boston. "The uncertainty of the economic environment combined with many defaults in the debt markets have significantly changed the lending parameters."