Banks that are exploring new strategies for recovering revenue amid sluggish loan growth can expect more scrutiny at their next regulatory exam.
That was the consensus from two panels at this year's American Bankers Association conference in San Diego. While the fallout from Basel III dominated the general assembly, bankers who attended breakout sessions were warned that regulators are closely watching how they plan to bolster the bottom line. Agency officials have specifically focused on banks' relationships with outside vendors as institutions look for new revenue streams.
Federal Reserve examiners are focusing on how institutions, especially small banks, plan to recoup revenue lost from reduced exposure to commercial real estate, said Kevin Bertsch, the associate director in the Fed's division of banking supervision and regulation. Bertsch, who participated in a Monday panel dedicated to regulatory hot buttons, said exams are looking at risks associated with banks' strategic plans.
A panel hosted by BancAlliance, which helps small banks team up on big corporate loans, re-emphasized the point. The Tuesday panel addressed ways banks can make regulators comfortable with BancAlliance's programs. "You need to be transparent with regulators on your strategy," said John Dugan, a partner at Covington & Burling and a former comptroller of the currency. Dugan is outside counsel for BancAlliance.
Diversification, including when institutions step outside of their specific area of expertise, is "an instant red flag for regulators," said Timothy Long, a managing director at Protiviti Consulting and a former senior deputy comptroller at the Office of the Comptroller of the Currency.
A day earlier, Jennifer Kelly, the OCC's senior deputy comptroller for midsize and community bank supervision, said the agency was looking at banks' strategic plans. Kelly and Mark Pearce, who oversees depositor and consumer protection at the Federal Deposit Insurance Corp., said that examiners werereviewing relationships with third-party providers.
Regulators have focused on such relationships in the past. In January, the FDICissued revised guidance on payments processors, advising that "account relationships with third-party entities that process payments for merchants require careful due diligence, close monitoring and prudent underwriting."
About a dozen of BancAlliance's 75 members have gone through recent regulatory exams, said Lee Sachs, the chief executive of Alliance Partners, which manages the cooperative.
"Clearly conversations with regulators are confidential," Lori Bettinger, BancAlliance's head of membership, said in an interview Friday. "But our members have given us the general impression that the focus has been on conducting sufficient due diligence on the decision to join BancAlliance while ensuring that they thoroughly underwrite each loan and remain mindful of their participation relative to capital and assets."
The BancAlliance panel provided advice to attendees who are interested in joining the group but wish to avoid the ire of examiners. The most important thing is open dialogue, it said, echoing the previous day's regulatory panel.
United Bank of Michigan in Grand Rapids is planning to send letters to the FDIC and its state banking regulator to discuss its participation in BancAlliance, said Art Johnson, the bank's chairman and chief executive. The bankjoined the cooperative in May.
Thorough documentation is also critical. "Banks should have expressly designated policies for loan participations," Dugan said.