Beefing up state regulation

Northwestern Financial Review, Jun 1-Jun 14, 2003 by Dullum, Justin

"Risk analysis has become a popular mantra among both state and federal regulators," said John Ryan, senior vice president of policy at the Washington, D.C.-based Conference of State Bank Supervisors, a trade group for advocates of the dual banking system. "Bankers need to look at their risks because a lot of the new rules are pushing risk analysis."

Applying the most scrutiny to red flags on the balance sheet is a logical move from a resource-intensive blanket approach. The focused scrutiny is also mandated by the U.S. Patriot Act and the Sarbanes-Oxley Act - two pieces of legislation created to weed out bad apples. The Patriot Act concerns terrorists while Sarbanes-Oxley addresses corporate criminals. Some bank industry experts say both acts threaten to unfairly burden those that did not commit the crimes that led to the laws - community banks, for example. Others are confident that the new rules will be refined to where they won't unnecessarily burden bankers.

"The agencies are asking, 'What risks, based on size, location and customer base, do examiners need to focus on?" said Alan Cox, vice president of the CSBS regulatory division. "I think new laws will be applied to banks in this regard as well. Congress didn't intend for the legislation to needlessly weigh down community banks, so I ultimately don't think it will."

The federal and state regulatory trend of focusing on risk might lead to less regulatory burden for some well-managed community banks.

The Minnesota Department of Commerce is attempting to reduce the burden on consistently high-rated banks by focusing on troubled institutions. Federal law requires banks be examined at least once every 18 months. State examiners alternate with federal agencies to perform these exams. Kevin Murphy, Minnesota Department of Commerce, wants to extend the exam cycle to 24 months for Minnesota's highest rated and best managed banks. "We have written agreements with the FDIC and the Fed that we'll continue to honor this 18-month cycle," Murphy said. "The world isn't going to change immediately just because we change the law here in Minnesota. My thinking on this is that somebody has to go first."

Murphy said he has discussed such a change with John Reich, vice chairman of the FDIC, which is supporting legislation that would ease the regulatory burden for banks.

"It's simply recognizing reality," Murphy said. "Bank regulators are already focusing on the most pressing problems. If you've got limited resources and troubled banks, you focus on them."

Recurring 18-month onsite examinations are at the center of what is referred to as regulatory burden, said Murphy. If state and federal lawmakers are serious about managing risks and relieving unnecessary burden, "This would be a huge way to do it," Murphy said.

Federal and state balance

That pending reg relief legislation - the Financial Services Regulatory Relief Act - would, among other things, lift certain restrictions on interstate branching. The measure illustrates how compromises between state and federal authorities can help keep state systems strong. Many state agencies can make interstate regulatory agreements on a bank-by-bank basis. Built into the reg relief bill is language that would allow states to keep these flexible agreements.