The Song Remains the Same (with apologies to Led Zeppelin)

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Regulator Takeaways from the Oklahoma Bankers Association Convention

I recently attended the Oklahoma Bankers Association 2018 Leadership Forum and Annual Convention held at the Hard Rock Hotel in Tulsa. Lots of interesting sessions and lots of great bankers as well. One of the best was the Regulator Roundtable with representatives from the Federal Reserve, FDIC, OCC, and the State Bank Commissioner of Oklahoma.

Each regulator began their presentation with the official disclaimer that the views they were expressing were “their own” and not that of the agency issuing their paycheck or paying their travel expenses. With that out of the way, they each shared some helpful insights for the upcoming twelve to eighteen months. There was a lot of overlap in the presentations, so I’m not going to attribute any comments to a particular agency – because all of the thoughts shared represented some solid banking advice. And all the regulators made a point of delivering their messages with a different tone – more collegial and less autocratic. Several even noted their agencies were focused on providing more support and implementing more local decision making in their agencies. We’ll see how that turns out.

What are some top risks to banks?

  • Credit risk due to Concentrations of Credit and some weakening of credit standards.

The regulators said the number of problem banks was decreasing, but carryover debt in the Ag sector was on the rise. Banks are managing that carryover debt at this time using restructuring, or overseeing an exiting from the industry for certain borrowers. But it was also noted that banks who saw increased Ag loan growth over the last couple years may have picked up someone else’s problems.

Regulators noted that energy revenue (oil and wind) was not providing the support to some borrowers they had in the past. Also on the Ag front, any tariff wars or problems with NAFTA will definitely cause problems for Ag producers and borrowers.

  • Cyber risk is a top concern.

Everyone seemed to know someone whose bank had been a victim of some sort of attack, ransomware, skimmer, phishing, etc. Some suggestions for dealing with the risks are use of the FFIEC Cyber Assessment Tool , and dealing with issues it exposes for your organization.  Most bankers are familiar with this tool and the issues it has exposed in their organizations.

Taking action on or mitigating those issues is mandatory. Continued and continual training on these risks is imperative. Interestingly, it was noted that the easiest way to hack a bank’s network was to provide a bank with requested financial documents on an infected thumb drive. Borrowers may not even know that what they are delivering to their banker contains a virus or hack of some sort.

  • Regulators see Interest rate risk as something to watch.

Rising interest rates, greater competition for deposits, and increasing loan demand make this something to get in front of. Loan to deposit ratios continue to climb and deposits become more critical every day.

Finally a couple other disconnected thoughts – first, about CECL. CECL is coming but not necessarily driving increasing ALLL balances. Banks should understand what “life of loan” means. An annually renewing credit line is not necessarily a “12 month” loan. And in this era of merger activity, retaining historical loan data from the merged bank will be important to CECL.

And all regulators talked about the need to modernize the CRA regulation to reflect how banks do business in 2018 and beyond. More on that to come later.

While all this information was presented in May 2018 as “top risks to banks,” none of the ideas were new. Managing the banks present and upcoming risks is still good banking. The song remains the same.

Chuck Marshall
Chuck improves the financial performance of community banks through strategic planning, management consulting, and enterprise risk management. With over 20 years of experience in the banking industry, he advises bankers toward optimal solutions that address both bank and community needs.
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