On April 27 and 28, I had the privilege of attending the Texas Bankers Hall of Fame and Bank Executives’ & Directors’ Seminar hosted by Sam Houston State University. I would like to congratulate the five Hall of Fame honorees: B.A. Donelson, Jack Griggs, George Martinez, Milton McGee, Jr., and the late Milton Payne. I enjoyed hearing about all of their incredible accomplishments and contributions to community banking in Texas. Congratulations on the well-deserved recognition!
Just like last year, the Seminar provided valuable information to the community bankers in attendance. As an attorney representing community banks, I was most interested in the bank regulatory panel. The panel was again moderated by Sam Golden, formerly with the OCC and now a bank consultant with Alvarez & Marsal. The panelists were Bobby Davenport (Texas Department of Banking), Nathan Heizer (FDIC), Bernadette Hernandez (OCC), and Robert Triplett (Federal Reserve). For those who were not able to make it to the Seminar, I have recapped some of the most helpful information that the regulators shared:
- Before turning things over to the moderators, Sam Golden noted that the level of uncertainty in the future of regulations (especially Dodd-Frank) is as high as it has ever been. He also noted that bank health and the economy are very good right now, but there may be a down cycle around the corner. He stressed that the time for bankers to prepare for a down cycle is now, while the economy is healthy.
- Bobby Davenport of the Department of Banking explained that Commissioner Charles Cooper is working on regulatory relief for community banks, including a special focus on a new home equity law pending in the Texas legislature that would reduce fees and other regulatory burdens and make smaller home equity loans more feasible. Mr. Davenport also noted the importance of cybersecurity issues for banks going forward.
- Robert Triplett of the Federal Reserve echoed Mr. Davenport’s comments on cybersecurity, noting that it is the number one risk area to the Fed. He observed that most banks now take cybersecurity threats seriously but a handful of smaller banks and banks in rural areas have not sufficiently addressed cybersecurity issues. He also pointed to credit risk and consumer compliance as the two other most significant areas of focus for the Fed. With respect to credit risk, Mr. Triplett emphasized the risk of concentration in energy lending and commercial real estate, especially multifamily. Regarding consumer compliance, he pointed to continuing issues with UDAAP regulations, with a particular emphasis on overdraft fees. He noted that banks need to ensure that their policies and procedures mirror actual practice—that is, actual practices should be consistent with written policies, and vice versa.
- Bernie Hernandez of the OCC noted that her agency’s concerns in credit concentration were similar to the Fed’s. Specifically, the OCC is focused on concentration in commercial real estate, which is a significant issue for banks in the OCC’s Southern District (in fact, the majority of banks that are over the CRE threshold are located in the Southern District). Ms. Hernandez also emphasized the importance of capital planning and meaningful stress testing. In response to an audience question, Ms. Hernandez clarified that meaningful stress testing would include income producing CRE as well as the entire retail center portfolio.
- Nathan Heizer of the FDIC noted that liquidity is becoming a major issue for his agency. This is important because if a bank falls out of the well-capitalized category, rate restrictions may lock the bank out of competitive deposit markets. Mr. Heizer explained that banks need to make sure their contingency funding plan has accounted for things like an economic recession or a downturn in specific markets and industries. He also stressed that banks need to be focused on interest rate risks and what increasing rates mean for the bank’s overall health.
- After the panelists discussed these focus areas for their agencies, many of the audience questions centered around competition and consistent regulation of all financial institutions. Each of the regulators agreed that, unfortunately, it is impossible to guarantee consistency across all regulators for all institutions. There was also specific discussion of credit unions and the lack of fairness in how they are regulated. As Mr. Triplett put it, the message among the different regulators is typically “stay in your own lane,” making it difficult for bank regulators to have any influence over how the NCUA regulates its member institutions.
In concluding remarks, Mr. Golden echoed comments from the regulators about concentration. He noted that no amount of capital or liquidity can overcome a risky credit concentration. He even stated that the regulators are too soft on credit concentration and suggested that they take a more aggressive approach.
In summary, the two most important issues to the regulators appear to be credit concentration and cybersecurity. As I wrote in previous posts (here and here), there are several steps that community banks can take to address cybersecurity issues. With respect to credit concentration, banks should regularly review their loan portfolios to ensure that they are not too highly concentrated, particularly in commercial real estate.
Once again, Sam Houston State put on a great event. Thank you to my grandfather, Dr. Jim Bexley, and his staff (especially Pam Thaler and Jackalyn Cauthen) for all their work in putting this event together. I look forward to attending again next year.