Conference of State Bank Supervisors

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Iowa Day with the Superintendent April 12,
2007 Neil Milner CAE President and
CEO Conference of State Bank Supervisors, Inc.
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CONFERENCE OF STATE BANK SUPERVISORSChampions of
the State Banking SystemStatement of Principles

• State System of Banking
• Our overriding goal is to maintain the state
  system as the charter of choice for community,
  multi-state, international and de novo financial
  institutions.
• The states must retain their role as the
  front-line, grass-roots regulator for the
  financial services industry.
• As state bank supervisors, we work at both the
  state and federal level for focused and efficient
  bank supervision.
• Federal regulatory preemption of state laws
  endangers the dual banking system and consumer
  protection.
• Through CSBS, the collective states have a single
  voice with Congress and federal policy makers and
  an organization for maintaining a pool of
  well-trained, focused banking regulation
  professionals.

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CONFERENCE OF STATE BANK SUPERVISORSChampions of
the State Banking SystemStatement of Principles
(cont.)

• Safety Soundness of Financial Institutions
• and the Banking System
• We believe that a significant goal of bank
  supervision and examination is to assure the
  safety and soundness of individual financial
  institutions and the overall banking system.
• Cooperation between state and federal regulators
  strengthens bank supervision, the financial
  services industry, and the economy.
• We support financial independence and budget
  autonomy for state banking departments as they
  pursue excellence in supervision.

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CONFERENCE OF STATE BANK SUPERVISORSChampions of
the State Banking SystemStatement of Principles
(cont.)

• Compliance with Banking and Consumer Laws
• We believe that bank supervision at the state
  level provides regulators that are accessible,
  who understand state laws, are in tune with the
  local economy, and knowledgeable about the
  consumer.
• We agree that for the supervision of interstate
  banks, the home state banking supervisor should
  be the primary regulator.

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CONFERENCE OF STATE BANK SUPERVISORSChampions of
the State Banking SystemStatement of Principles
(cont.)

• Promoting Economic Development
• We recognize that community banks, most of which
  are state-chartered, drive the economic success
  of Main Street America.
• We support the authority of our states to empower
  banks to develop new services that serve the best
  interests of our citizens.
• Approved by the CSBS Board of Directors,
  September 2006

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Improved Website!!

• www.csbs.org
• Board IT areas restricted
• New Features on our website
• Event registration
• Pay membership dues online
• Improved Regulatory area
• Examiner Resource Links
• Mortgage Licensing
• Systems working together
• Website membership database interfaced
• Database accounting interfaced

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2007 Annual Meeting Conference

• Coeur dAlene, ID
• May 30 June 1, 2007
• NEW Industry All Day Session
• Marketing
• Save the Date Cards Eblast
• Exhibitor/Sponsor Prospectus
• Preliminary Program
• Register TODAY!!!!
• www.csbs.org

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CSBS/AARMRMortgage Licensing System

• Two primary objectives
• Provide uniform mortgage application for every
  agency
• Develop comprehensive registry of record for
  participating states to house the information
  from the uniform application

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System Schedule

• System to go live 1/1/2008
• Uniform annual renewal and annual reports to go
  live end of 2008
• 7 states using MU Forms, expect another 9 over
  next 3 months
• 29 States signed Statement of Intent to try to
  come on the System by the end of 2009
• Quarterly functional upgrades to System
  throughout 2008 2009
• Expect 4-6 states to come onto system quarterly
  throughout 2008 2009

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FFIEC STATES HAVE A VOTE
FFIEC- States have a VOTE

• SLC
• Chair- Steve Antonakes (MA - CSBS)
• Sandra Branson (MO - NASCUS)
• Bill Waits (NJ - ACSSS)
• Mick Thompson (OK At Large)
• Eric McClure (MO At Large)
• Taskforces Working Groups
• Representation
• State and CSBS Staff
• Guidelines

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Risk Based Capital Basel IA

• CSBS supported direction of the initial proposal
• Current proposal scaled back significantly
• Residential mortgage loans risk weighted by LTV
• Risk Ratings for external credit ratings
• Little applicability in the loan portfolio for
  most banks
• Short-term commitments risk weighted with a 10
  conversion factor

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Risk Based Capital Basel IA

• No changes
• Small business loans
• Multifamily residential loans
• Non-current loans
• Commercial real estate exposures
• Will provide some appropriate relief to community
  banks.
• Opens a door to incremental changes positive
  and negative.
• DO NOT DISCOUNT ITEMS IN THE ANPR PERHAPS A
  LOOK INTO THE FUTURE.
• The proposal is an opt-in. Banks can choose to
  remain under the current rules.
• CSBS Not worth the effort!

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Who would want RBC relief?
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Risk Based Capital Basel II

• Numerous unresolved issues between the agencies.
• Standardized Approach
• Safeguards (transition periods, leverage ratio,
  10 aggregate drop)
• This will be the first time the U.S. has had
  different capital rules for different types of
  banks.

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Risk Based Capital Basel II

• State System Perspective
• Need to consider Standardized Approach in the
  U.S.
• What is the systemic impact from multiple capital
  rules?
• Competition
• Consolidation
• Safety Soundness
• State regulator access to confidential reporting
  data from Basel II banks.
• Institution only versus a view of the system

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How do you measure competitive disadvantage?
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Commercial Real Estate Guidance

• Issued by agencies on December 6, 2006
• Two key thresholds as of Capital
• 100 Construction Land Development
• 300 CLD, multi-family CRE
• Thresholds do not apply to OTS supervised
  institutions.
• Expectations
• Stress testing
• Market analysis
• Underwriting according to secondary market
  standards
• More Capital!
• We must be vigilant in ensuring the guidance is
  implemented as stated
• Thresholds are not limits
• Does not discourage CRE lending
• Examiner training will be key

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Mortgage Products Nontraditional

• Federal financial agencies released their final
  guidance on September 29.
• CSBS/AARMR released parallel guidance on November
  14
• Applies to state-licensed mortgage providers who
  were not covered by the interagency guidance.
• Closely mirrors interagency guidance, but without
  provisions that are inapplicable to mortgage
  providers (portfolio management, capital levels,
  etc.)
• As of April 11, 31 states plus D.C. have adopted
  the guidance

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Mortgage Products Nontraditional
Mortgage Products Sub-Prime

• Consumer advocacy groups and Congress have
  expressed concern with 2/28 3/27 ARMS.
• Fixed at above market rate for 2 or 3 years,
  re-price each 6 months after initial period.
• Designed to repair credit.
• Payment shock after initial period is
  significant.
• Policy Statement
• Qualify customers at full-indexed, amortizing
  rate.
• Timely, clear disclosure
• Balanced marketing
• The fine line between sub-prime predatory!
• CSBS will draft parallel guidance similar to NTM.

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Risk Based Assessments

• Components
• Weighted CAMELS
• (25, 20, 25, 10, 10, 10)
• Six Financial Ratios
• Long-term debt issuer rating
• Well Capitalized banks pay between 5 and 7 basis
  points (others pay between 10 and 43).
• Well Capitalized de novo banks pay 7 basis points
  for five years, beginning in 2010.
• Know your ratings definitions they now have a
  financial impact!

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Supervisory Processes Issues

• GETs/WPS
• BSA
• Best Practices
• Exam Tools
• GENESYS
• ALERT
• FDICConnect
• Interagency Examination Repository (IER)

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GETS/WPS

• Government Emergency Telecommunications System
  FREE
• Use Calling Card
• GETS provides emergency access and priority
  processing in the local and long distance
  segments
• Wireless Priority System
• program for priority cellular network access
• WPS is accessed by dialing 272 before the
  destination number using a phone that has been
  subscribed with the WPS Feature.

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BSA Exam Manual Update

• BSA/AML Examination Procedures
• Update scheduled for Fall 2007
• InfoBase training CD available on FFIEC website
• Available TRAINING
• CSBS 'Boot Camp' for BSA professionals 2007
• Annual BSA Conference
• FFIEC Annual Conference- Pilot 2007

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BSA State MOUs

• FinCEN
• 40 banking departments have signed the
  information sharing agreements
• 8 are in the review or final stages of process
• 6 other states need to change their statutes
  prior to having the ability to sign the
  agreements
• IRS
• 35 have signed
• OFAC MOU
• 9 states have signed

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Advocate In the Agencies and on the Hill
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Congressional Agenda Items

• New Congress the 110th
• Government sponsored enterprises regulating
  housing finance
• Will be introduced and marked-up in the House
  Financial Services Committee in the near future
  (the recent mark-up was temporarily postponed).
• Predatory Lending
• Data Security
• Preemption
• Terrorism Re-Insurance Act (TRIA)
• Regulatory relief (Signed into law on October 13,
  2006 PL 109-351)

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Regulatory Burden Reduction

• Legislation passed the Congress as S. 2856 and
  was signed into law on October 13, 2006, as P.L.
  109-351.
• What CSBS called for in testimony
• Focus on Community Banking (Communities First
  Act, Rep. Ryun, R-KS) Several provisions were
  added to the House Bill)
• Flexibility for state chartered Federal Reserve
  member banks
• Review of Riegle-Neal interstate branching
• IRS re-interpretation on tax status of LLCs
• State vote on FFIEC
• Interstate supervision policy
• Review of federal regulatory preemption policy
• The law includes

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State Vote on FFIEC

• The State Liaison Committees role was one of
  advising the FFIEC on issues
• When it came time to vote or a member called for
  an executive session, the state groups had to
  sit on their hands
• We asked for a real vote on the FFIEC
• This is now LAW and the State Liaison Committee
  now has a VOTE on the FFIEC

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Extended Exam Cycle

• Extend 18 month examination cycle to well
  capitalized, well managed banks under 500
  million (up from 250 million on old law).
• It has been suggested that the Federal Deposit
  Insurance Fund would be alive and well even if
  all banks under 500 million failed
• Due to a drafting error in S. 2856, the 18 month
  exam cycle did not apply for certain
  well-managed, well-capitalized institutions with
  good ratings. The Congress passed H.R. 6345
  during the lame duck session to include the
  good rated institutions.

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Litigation

• Wachovia v. Burke (appealed to Supreme Court
  Cert. pending)
• Watters v. Wachovia (Argued before the Supreme
  Court in Novemberpending decision any time now)
• National City v. Turnbaugh (appealed to the
  Supreme Court Cert. pending)
• OCC/NY Clearinghouse v. Spitzer (appealed to the
  2nd Circuitdecision on hold pending Watters case)

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interstate compared to one-state banks, state and
national
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(No Transcript)
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Professional DevelopmentDeveloping Financial
Professionals

• BSA Boot Camps
• Problem Bank School
• Real Estate Appraisal
• Fraud Identification
• MSB Examiners Course

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Professional Development (cont)Developing
Financial Professionals

• BSA Boot Camp
• 10 Boot Camps 3 Mini Camps Conducted
• Intensive hands on exercise based program
• 209 State Federal Regulators from 34 states
• 181 Bankers and Industry participants
• New Prepaid Card Mini-Camp Developed
• Intensive 1 ½ day exercise based program
• Precourse programs
• First Session Las Vegas, February 25-26
• Second Session Scheduled for the Seidman Center,
  April 23-24
• Certified Anti-Money Laundering Specialist
• New Certification Designation Available
• Education Requirements
• On-the-Job Experience
• Attestation of Supervisor
• Continuing Education Credits

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Professional Development (cont)Developing
Financial Professionals

• Problem Bank School
• 4 ½ day Blended Learning Program
• Morning Lectures Case Studies
• Afternoon Web-Based Bank Simulation (with a
  problem institution)
• Update March 2007
• Learn how to
• Reconcile correspondent bank accounts
• Trace loan proceeds
• identify red flags
• risk focus the exam
• identify and prevent fraud
• draft enforcement actions
• document to prevent or prepare for litigation

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Professional Development (cont)Developing
Financial Professionals

• Real Estate Appraisal Review
• 5-week web-based course
• 8 to 10 hours a week
• Learn how to
• Effectively use appraisal reports
• Describe the various types of appraisal reports
• Explain the appraisal valuation process
• Describe the identification aspects of highest
  and best use analysis step of the appraisal
  valuation process
• Describe and apply the cost, direct sales
  comparison, and income capitalization approaches
  to valuation.

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Professional Development (cont)Developing
Financial Professionals

• Fraud Identification Training
• 5-week web-based course
• 21 real-life case studies
• 6 to 8 hours a week
• Learn how to
• Identify weaknesses in internal controls that may
  lead to fraud
• Recognize red flag issues that may require
  additional examination procedures
• Identify measures that could correct internal
  control weaknesses noted
• Recognize the importance of investigating weak
  internal control programs

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Professional Development (cont)Developing
Financial Professionals

• Money Service Business Examiners Course (online)
• 3 Courses conducted since April 2006
• 57 State and Federal Regulators from 20 states
• 2 Industry participants
• Exam-focused curriculum
• BSA/AML component
• Two more programs 2007

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Contact Information

• Neil Milner CAE
• President CEO
• Conference of State Bank Supervisors
• 1155 Connecticut Avenue NW 5th Floor
• Washington, DC 20036
• (P) 202.728.5702
• (F) 202.296.1928
• nmilner_at_csbs.org
• www.csbs.org