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Sustainable Banking Seminar Stanford University April 3, 2013

Safe and Sound Banking Teveia R. Barnes Commissioner State of California Department of Financial Institutions. Sustainable Banking Seminar Stanford University April 3, 2013. Ensure Safe and Sound Banking Promote public confidence in the health of the regulated institutions

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Sustainable Banking Seminar Stanford University April 3, 2013

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  1. Safe & Sound Banking - Stanford CEE 244A Safe and Sound BankingTeveia R. BarnesCommissionerState of California Department of Financial Institutions Sustainable Banking SeminarStanford University April 3, 2013

  2. Safe & Sound Banking - Stanford CEE 244A • Ensure Safe and Sound Banking • Promote public confidence in the health of the regulated institutions • Benefits of a healthy financial services system • Implement policy by administering the law • Managing the chartering and regulatory process DFI as Prudential Regulator

  3. Safe & Sound Banking - Stanford CEE 244A Changes Among State Banks2012

  4. Safe & Sound Banking - Stanford CEE 244A Changes Among State Banks2012

  5. Safe & Sound Banking - Stanford CEE 244A Changes Among State Banks 2005 – 2012

  6. Safe & Sound Banking - Stanford CEE 244A Changes Among State Banks2005 - 2012

  7. Safe & Sound Banking - Stanford CEE 244A Regulation Encompass • Granting of licenses to conduct banking business in the State • Approval of bank mergers, acquisitions, consolidations, changes in articles and bylaws and the sale of securities • Conducting periodic examinations • Review and analysis of periodic reports • Issuance and enforcement of supervisory and other regulatory actions • Rendering counsel and advice on banking issues and/or problems • Closure and liquidation

  8. Safe & Sound Banking - Stanford CEE 244A Examination & Supervision of Banks • Bank examination is the foundation of bank supervision • Bank supervision • Evaluation of the abilities of bank management • Supervision used to strengthen or replace management • Management demonstrates the inability to effectively direct the activities of the bank or • Continued viability of the bank is threatened

  9. Safe & Sound Banking - Stanford CEE 244A Bank Examinations • Findings the field examination, DFI is in a position • to determine whether the bank is being operated in a safe and sound manner, • to prescribe necessary corrective actions, and • to formulate specific supervisory actions for the bank, if needed. • The extent of the corrective actions required or supervisory advice given varies from bank to bank.

  10. Safe & Sound Banking - Stanford CEE 244A CAMELS

  11. Safe & Sound Banking - Stanford CEE 244A CAMELS RATINGS • The specific areas of a bank that are evaluated include: • Capital Adequacy • Asset Quality • Management • Earnings • Liquidity and Funds Management • Sensitivity to Market Risk • Each of the components is rated on a scale of "1" through "5" in ascending order of performance deficiency. A rating of "1" represents the highest and "5" the lowest and most critically deficient level of operating performance. • Component/Composite rating: 232212/2 • CAMEL RATINGS OF A BANK ARE CONFIDENTIAL

  12. Safe & Sound Banking - Stanford CEE 244A Bank RatingsCAMELS 1 Composite • COMPOSITE 1 • Sound institutions in almost every respect • Any critical findings are a minor in nature and can be handled in a routine manner. • These banks are resistant to external economic and financial disturbances • Capable of withstanding the vagaries of business conditions • Rating "1" indicates strong performance. It is the highest rating and is indicative of performance that is significantly higher than average

  13. Safe & Sound Banking - Stanford CEE 244A Bank RatingsCAMELS 2 Composite • COMPOSITE 2 • Fundamentally sound institutions but may reflect modest weakness correctable in the normal course of business. • Stable and also able to withstand business fluctuations quite well; however, areas of weakness could develop into conditions of greater concern. • Rating "2" reflects satisfactory performance. • Performance that is average or above; it includes performance that adequately provides for the safe and sound operation of the bank.

  14. Safe & Sound Banking - Stanford CEE 244A Bank RatingsCAMELS 3 Composite • COMPOSITE 3 • Combination of weaknesses ranging from moderately severe to unsatisfactory. • Only nominally resistant to the onset of adverse business conditions and could easily deteriorate if concerted action is not effective in correcting the areas of weakness. • Vulnerable and require special supervisory attention. • Rating "3" represents performance that is flawed to some degree; as such it is considered fair.

  15. Safe & Sound Banking - Stanford CEE 244A Bank RatingsCAMELS 4 Composite • COMPOSITE 4 • Immoderate volume of asset weaknesses, or a combination of other conditions that are unsatisfactory. • Unless prompt corrective action is taken, the bank could reasonably develop into a situation that could impair future viability. • A potential for failure is present. Banks in this category require close supervisory attention and financial surveillance • Rating "4" refers to marginal performance and is significantly below average; if left unchecked, such performance could threaten the viability of the institution.

  16. Safe & Sound Banking - Stanford CEE 244A Bank RatingsCAMELS 5 Composite • COMPOSITE 5 • Volume and character of weaknesses are such as to require urgent aid from the shareholders or other sources • Require immediate corrective action and constant supervisory attention. The probability of failure is high for these banks • Rating "5" is considered unsatisfactory. It is the lowest rating and is indicative that performance is critically deficient and in need of immediate remedial attention. • Such performance by itself, or in combination with other weaknesses, threaten the viability of the institution.

  17. Safe & Sound Banking - Stanford CEE 244A Safe and Sound Banking • Banks that are operated in a safe and sound manner, have management that exhibit a clear understanding of or has delineated the following: • mission, vision, and values; •  impact of the environment on the organization; •  culture; • strengths, weaknesses, opportunities, and threats; •  goals to be accomplished in the future; and • how those goals will be reached through strategies, objectives, responsibilities and time-lines.

  18. Safe & Sound Banking - Stanford CEE 244A Safe and Sound Banking • With an understanding of the environment the institution is operating in, management may then develop: • the products and services the bank is willing to provide;  • an organizational design and the roles that are needed by the organization; • a risk management framework supported by strong policies and procedures; • performance goals; and • the resources needed to reach those goals

  19. Safe & Sound Banking - Stanford CEE 244A Examination Trends

  20. Safe & Sound Banking - Stanford CEE 244A Enforcement Actions • Board Resolutions • Voluntary representation by the bank board to take specific future actions to improve bank’s condition • Memorandum of Understanding (MOU) • Lowest level of enforcement action • Two party informal agreement between the bank and the regulator, usually implemented when the bank’s condition has fallen to less than satisfactory. • This agreement defines what specific steps, and when they will be taken. • This action may be “joint” with other regulators.

  21. Safe & Sound Banking - Stanford CEE 244A Enforcement Actions • Regulatory Agreements (Written Agreement) • Contract between the bank and the Commissioner. • Any breach on the part of the bank may result in a Cease & Desist Order, and/or allow the Commissioner to enforce the breached term. • This action may be “joint” with other regulators.

  22. Safe & Sound Banking - Stanford CEE 244A Enforcement Actions • Cease & Desist Orders (C&D) or Consent Orders • C&D Order may be a unilateral action of the Commissioner, or the final order may be issued with the written consent of the respondent bank. • C&D Orders set forth goals, which must be achieved in a short time frame. • Suspension or Removal of Officers, Directors, Employees • May provide for an immediate removal order under certain specific circumstances.

  23. Safe & Sound Banking - Stanford CEE 244A Civil Money Penalties (CMP) • DFI has authority to impose civil money penalties against banks for acts that violate certain provisions of the Financial Code. • The penalty is based on a three tier system and penalty amount subject to specific findings and certain conduct standards.

  24. Safe & Sound Banking - Stanford CEE 244A Enforcement Actions in 2012 • 24 state chartered banks that were the subject of enforcement actions: • 6 Cease and Desist orders • 3 Board Resolutions • 15 Memorandums of Understanding • 34 state chartered banks enforcement actions were lifted: • 12 Cease and Desist Orders • 4 Board Resolutions • 18 Memorandums of Understanding.

  25. Safe & Sound Banking - Stanford CEE 244A Enforcement Actions in 2012

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