House Appropriations Subcommittee on Business and Economic Development

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House Appropriations Subcommittee on Business
and Economic Development
Budget Hearing
Texas Department of Banking Testimony of Charles
G. Cooper Banking Commissioner February 26,
2009
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Department Overview

• Established in 1905 by the 29th Legislature.
• Rich tradition of professional and sound
  regulation.
• Practices and promotes fiscal responsibility.
• Reduces regulatory burden by coordinating
  regulatory activities with other state and
  federal agencies.
• Our mission is to ensure Texas has a safe, sound
  and competitive financial services system.
• Regulatory oversight in the banking industry is
  countercyclical, and during times of economic
  stress there is an increased need for
  supervision.

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Statutory Mandates

• Banks, Trust Companies, Foreign Bank Agencies and
  Check Verification Companies
• Chapter 31 of the Texas Finance Code requires the
  Banking Commissioner to examine each state bank
  annually or on another periodic basis the Banking
  Commissioner considers necessary to safeguard the
  interest of depositors, creditors, shareholders,
  participants and participant transferees.
• Chapter 181 of the Texas Finance Code requires
  the Banking Commissioner to examine each state
  trust company annually or more often as the
  Banking Commissioner considers necessary to
  safeguard the interest of clients, creditors,
  shareholders, participants and participant-transfe
  rees.
• Chapter 204 of the Texas Finance Code requires
  the Banking Commissioner to examine each Texas
  state branch, agency or representative office of
  a foreign bank annually or more often as the
  Banking Commissioner considers necessary to
  determine if the office is operated in a safe and
  sound manner.
• Section 11.309 of the Texas Finance Code requires
  the Banking Commissioner to register check
  verification entities and operate a secure
  electronic system to facilitate notification of
  closed bank accounts subject to fraud.

Offered by Texas Department of Banking February
2009
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Statutory Mandates Continued

• Prepaid Funeral Contract Sellers, Perpetual Care
  Cemeteries, Money Service Businesses and Private
  Child Support Enforcement Agencies
• Chapter 154 of the Texas Finance Code requires
  that the Banking Commissioner examine each
  prepaid funeral contract seller annually or more
  often as deemed necessary to protect the prepaid
  funds and to assure that the contracted services
  and merchandise are provided at the time of
  death.
• Chapter 712 of the Texas Health and Safety Code
  requires that the Banking Commissioner examine
  each perpetual care cemetery annually or more
  often as deemed necessary to protect and
  safeguard the perpetual care trust funds and to
  assure that the fund income is used to maintain
  and support cemetery maintenance.
• Chapter 151 of the Texas Finance Code (Money
  Services Act) requires that the Banking
  Commissioner examine each money service business
  (currency exchange, transportation, transmission,
  stored value cards, and third party bill payers)
  annually to protect and safeguard customer funds
  and prevent money laundering and funding of
  terrorist activities.
• Chapter 396 of the Texas Finance Code requires
  the Banking Commissioner to monitor private child
  support enforcement agencies through registration
  and investigation of consumer complaints.

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Assets Under Supervision in Texas
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Revenue Sources

• The Department is fully self-funded and fully
  self-leveling.
• Fees and assessments on regulated entities fund
  100 of the agencys expenditures.
• Expenditure reductions will not benefit the
  states General Revenue Fund.
• By statute, the Department of Banking is limited
  to collecting fees and assessments that cover
  only the agencys direct and indirect
  expenditures.

Primary Expenses

• The Departments expenditures are mainly
  personnel related.
• Salaries and other personnel expenses average 80
  of total expenditures.
• Travel related expenses, mainly to conduct
  examinations, average 11 of total expenditures.

Budget Hearing
Offered by Texas Department of Banking February
2009
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Summary of L.A.R. for FY 2010 and 2011Texas
Department of Banking
Summary of L.A.R. for FY 2010 and 2011Texas
Department of Banking
Summary of L.A.R. for FY 2010 and 2011Texas
Department of Banking
Revised Rider Comments
Contingency Appropriations State Regulatory Response Amendments to rider (1) Allow the agency the ability to seek examiner salary adjustments if salary levels are not competitive with the FDIC (2) Make interim salary adjustments a component of future base appropriation requests and (3) Assign a unique pay code to these type of salary adjustments.
Budget Hearing
Offered by Texas Department of Banking February
2009
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Summary of L.A.R. for FY 2010 and 2011Texas
Department of Banking
Budget Hearing
Offered by Texas Department of Banking February
2009
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Summary of L.A.R. for FY 2010 and 2011Texas
Department of Banking
Summary of L.A.R. for FY 2010 and 2011Texas
Department of Banking
Budget Hearing
Offered by Texas Department of Banking February
2009
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Exceptional Items Requested for FY 2010 and 2011
Texas Department of Banking
 Exceptional Items Amount for Each FY Comments
Continue Funding of Interim Contingency Rider Appropriations (original LAR request) 278,376 287,948 (Amount not funded in base bill) Provides continued funding for the 2008 interim appropriations received for the oversight of Comerica Bank and examiner and related directors market salary adjustments. Without the continuation of the appropriations, the agency will be unable to adequately regulate Comerica Bank and examiners will likely leave if salary adjustments are taken back. The amount included in the base bill was calculated from partial funding for 2008 (beginning January 2008) and full funding for 2009 of the market salary adjustments. This unfunded amount represents monies needed each year to completely fund the market salary adjustments in 2010 and 2011.
Career Path Promotions for Financial Examiners I-VI 282,231 562,259 Provides funding for promotions in the Financial Examiner I-VI series. Career path promotions based on performance will enable the agency to build an experienced workforce and demonstrate to employees that state service can be a viable long term career.
Commissioner Salary Adjustment 28,809 28,809 Provides a salary adjustment for the Commissioner to 165,000 annually to align the positions salary to market competition. This increase is comparable to the State Auditors Office August 2008 market analysis on exempt position salaries.
Budget Hearing
Offered by Texas Department of Banking February
2009
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Possible New Exceptional Items Requested for FY
2010 and 2011 Texas Department of Banking
  New Exceptional Item Amount for Each FY Comments
Funding for Additional Senior Level Experienced Examiner Staff 2010 - 2,058,980 (14 examiners) 2011 - 2,058,980 (14 examiners) Regulatory oversight in the banking industry is countercyclical, and during times of economic stress there is an increased need for supervision. When the original LAR was prepared, we did not expect the number of problem banks to rise so quickly. (See details of the problem bank analysis and expenditure detail at Appendix A)

• Problem banks require experienced examiners that
  can adequately identify weak lending practices
  that may further deteriorate the bank financial
  condition.
• Problem banks are examined every six months.
• Problem banks increase the number of examination
  hours by approximately 56 due to the expanded
  work procedures in high risk areas.
• Problem banks require continuous monitoring of
  compliance with administrative and enforcement
  actions.

Offered by Texas Department of Banking February
2009
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Budget Hearing
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Possible New Exceptional Items Requested for FY
2010 and 2011 Texas Department of Banking
  New Exceptional Item Amount for Each FY Comments
Funding for Competitive Salary Adjustments 422,953 422,953 To retain senior personnel by remaining competitive with the FDIC. Will bring the Financial Examiner VII through Director series average salaries to within 90 of the FDIC average. (34 FTEs)
Hiring and Staffing Losses January 2009 Unable to rehire senior examiner with 16 years of experience. Examiner went to work with FDIC for a salary 12,000 above our offer. February 2009 Review Examiner with 23 years regulatory experience resigned to go work for the FDIC with an approximate salary increase of 10,000. February 2009 Senior Examiner with 15 years regulatory experience is in negotiations with FDIC for an undisclosed salary increase. Within the last six months, we have had 6 Financial Examiner VII postings with only 2 qualified external candidates. 26 or 9 of our Financial Examiner VII through Director series are eligible to retire today. In the next three years, 44 or 15 of our Financial Examiner VII through Director series are eligible to retire. In the next five years, 65 or 22 of our Financial Examiner VII through Director series are eligible to retire.

Offered by Texas Department of Banking February
2009
Budget Hearing
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Texas Department of Banking Salary Comparison
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Budget Hearing
Offered by Texas Department of Banking February
2009
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Profile of Regulated Entities
Regulated Entity Number of Entities Total Assets (billions)
Commercial Banks 329 156
Foreign Bank Agencies 9 51
Public Trust Companies 22 29
Prepaid Funeral Licensees 412 3
Perpetual Care Cemeteries 243 0
Money Service Businesses 128 75
Private Child Support Enforcement Agencies 13 N/A
Check Verification Entities 6 N/A
Totals 1,162 316
Information as of September 2008. Does not
include 22 out-of-state, state-chartered banks
operating in Texas (28,108 million)
Offered by Texas Department of Banking February
2009
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Department Staffing by Strategy
STRATEGY STAFFING LEVELS 1 Financial Examiners, Program Administrators and Related Directors Other Total
Bank Examination 102 8 110
Comerica Bank Examination 8 2 10
Non-Bank Examination 16 4 20
Application Processing 5 2 7
Administration   25 25
Regulatory Oversight   1 1
TOTALS 131 42 173
TURNOVER 2      
Fiscal Year 2008 10.9 22.5 13.6
Fiscal Year 2007 9.4 14.6 10.8
Fiscal Year 2006 14.0 19.0 15.8
Fiscal Year 2005 21.2 16.3 20.9
Fiscal Year 2004 12.0 22.5 14.4
Fiscal Year 2003 8.8 14.3 10.2
Fiscal Year 2002 12.0 22.5 14.1
Fiscal Year 2001 21.7 20.0 21.0
1 Represents actual staffing as of 12/1/08. 2
Including interagency transfers.
Budget Hearing
Offered by Texas Department of Banking February
2009
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Appendix A