The keynote speaker, Louis Hernandez, Jr. was the highlight of the forum. Louis is an advocate for community banks and author of Too Small to Fail. His presentation focused on how the global economy is changing and how banks can prepare for the future. He explained how important education is and shared an astonishing statistic: China and India both have more honor students than the U.S. has kids. He also explained how the cost of doing business for banks has increased and key areas banks can focus on to remain competitive in the future. I am including a link to Louis’ presentation and notes. I highly recommend viewing this impressive presentation. Click here to view the link.

Peter Viglucci, Director of Technology at P & G Associates, had an interesting presentation on Trends and Challenges in IT Security. He explained the importance of risk assessments and the controls in place to mitigate high risks. He said one of the most common controls missing in community banks is the centralized patch management server only updating Microsoft products. Adobe and Java are normally not centrally patched and unfortunately are the most patched programs on workstations. I have to agree with Peter. After running vulnerability scans on banks, over 65% of vulnerabilities are a combination of an adobe product and Java. Keeping those 3rd party programs patched would greatly improve vulnerability scan results.

Another control Peter discussed was website monitoring. He speculated that most community banks outsource their website hosting and believe that their webpage is safe. On top of that, hacking a bank website doesn’t give hackers access to any customer information. Although there is no customer information on bank websites, a hacker could deface the website and ruin a banks reputation or a hacker could manipulate the site so that a link could be added that would take a customer to a website used to gather personal information. He believes banks should have some form of automated email sent to them after a webpage has been updated. This control would allow banks to monitor all changes made to their website.

Risks were definitely the main topic, but new technology was also discussed. There are now multiple banks using board management software for iPads that allow board members to follow the topics of the board meeting on their iPad. One piece of software that was discussed was Diligent Board. And finally, social media and the risks associated was a hot topic as it was mentioned in almost all presentations I attended. I will save that topic for next month.

The conference was outstanding and I look forward to attending next year. If you have any questions, please don’t hesitate to email or call me.

By Chris Griesemer, IT Security Specialist

Here is a great article by Forbes.com that explains the issue further,  U.S. Regulators Squeeze Banks On Future Tax Assets.

From the Daily Bail, a website devoted to bailout news, opinion and analysis:

Can We Party like it’s 1776 and Just Start Over? Thomas Jefferson’s Top 10 Quotes on Money and Banking 

“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

“I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale.” –Thomas Jefferson to John Taylor, 1816. ME 15:23

“Everything predicted by the enemies of banks, in the beginning, is now coming to pass. We are to be ruined now by the deluge of bank paper. It is cruel that such revolutions in private fortunes should be at the mercy of avaricious adventurers, who, instead of employing their capital, if any they have, in manufactures, commerce, and other useful pursuits, make it an instrument to burden all the interchanges of property with their swindling profits, profits which are the price of no useful industry of theirs.” –Thomas Jefferson to Thomas Cooper, 1814. ME 14:61

“The art and mystery of banks… is established on the principle that ‘private debts are a public blessing.‘ That the evidences of those private debts, called bank notes, become active capital, and aliment the whole commerce, manufactures, and agriculture of the United States. Here are a set of people, for instance, who have bestowed on us the great blessing of running in our debt about two hundred millions of dollars, without our knowing who they are, where they are, or what property they have to pay this debt when called on.”

“I own it to be my opinion, that good will arise from the destruction of our credit. I see nothing else which can restrain our disposition to luxury, and to the change of those manners which alone can preserve republican government. As it is impossible to prevent credit, the best way would be to cure its ill effects by giving an instantaneous recovery to the creditor. This would be reducing purchases on credit to purchases for ready money. A man would then see a prison painted on everything he wished, but had not ready money to pay for.” –Thomas Jefferson to Archibald Stuart, 1786. ME 5:259

“If the debt which the banking companies owe be a blessing to anybody, it is to themselves alone, who are realizing a solid interest of eight or ten per cent on it. As to the public, these companies have banished all our gold and silver medium, which, before their institution, we had without interest, which never could have perished in our hands, and would have been our salvation now in the hour of war; instead of which they have given us two hundred million of froth and bubble, on which we are to pay them heavy interest, until it shall vanish into air… We are warranted, then, in affirming that this parody on the principle of ‘a public debt being a public blessing,’ and its mutation into the blessing of private instead of public debts, is as ridiculous as the original principle itself. In both cases, the truth is, that capital may be produced by industry, and accumulated by economy; but jugglers only will propose to create it by legerdemain tricks with paper.” –Thomas Jefferson to John W. Eppes, 1813. ME 13:423

“The Bank of the United States is one of the most deadly hostilities existing, against the principles and form of our Constitution. An institution like this, penetrating by its branches every part of the Union, acting by command and in phalanx, may, in a critical moment, upset the government. I deem no government safe which is under the vassalage of any self-constituted authorities, or any other authority than that of the nation, or its regular functionaries. What an obstruction could not this bank of the United States, with all its branch banks, be in time of war! It might dictate to us the peace we should accept, or withdraw its aids. Ought we then to give further growth to an institution so powerful, so hostile?” –Thomas Jefferson to Albert Gallatin, 1803. ME 10:437

Regulating Banking Institutions

“The principle of rotation… in the body of [bank] directors… breaks in upon the espirit de corps so apt to prevail in permanent bodies; it gives a chance for the public eye penetrating into the sanctuary of those proceedings and practices, which the avarice of the directors may introduce for their personal emolument, and which the resentments of excluded directors, or the honesty of those duly admitted, might betray to the public; and it gives an opportunity at the end of the year, or at other periods, of correcting a choice, which on trial, proves to have been unfortunate.” –Thomas Jefferson to Albert Gallatin, 1803. ME 10:437

Paper Speculation

“A spirit… of gambling in our public paper has seized on too many of our citizens, and we fear it will check our commerce, arts, manufactures, and agriculture, unless stopped.” –Thomas Jefferson to William Carmichael, 1791. ME 8:230

“Our public credit is good, but the abundance of paper has produced a spirit of gambling in the funds, which has laid up our ships at the wharves as too slow instruments of profit, and has even disarmed the hand of the tailor of his needle and thimble. They say the evil will cure itself. I wish it may; but I have rarely seen a gamester cured, even by the disasters of his vocation.” –Thomas Jefferson to Gouverneur Morris, 1791. ME 8:241

Kansas leads the other states with number of enforcement actions.  And as expected the OCC and the FDIC lead with the largest number of enforcement actions issued.  Let me know if notice anything else interesting.

The banks responded overwhelmingly!  Here is a chart I found on the Oklahoma Bankers Association website that shows the response of bankers by activist state.  Overall a good showing for our clients in MO and Oklahoma.  Congratulations on your involvement!

Posted by Tom Beisner, CPA, The Whitlock Company, August 4, 2009

Over the last couple of years the OCC in particular has been using formal agreements as a regulatory tool to force banks to change the way they are conducting business.  In today’s environment with bank failures coming at such a fast pace this makes some sense.  However, I have seen cases where the bank has a problem in the management area, they are placed under a formal agreement with the OCC, they immediately correct the situation and it takes another 18 months to get the formal agreement removed.

My point is once these banks are under a formal agreement, the OCC seems reluctant to release them in a timely manner.  In these cases the bank had a way out.  They could switch to a state charter if the state’s top regulator approved.  Now the FFIEC has effectively taken away that option for these banks with the words “Conversion requests submitted while serious or material enforcement actions are pending should not be entertained”.  I do not believe that any state regulator would accept a charter that they believed would ultimately fail.  Shouldn’t the state regulator have the right to make this decision?

Let me know your thoughts.

He made these remarks during the annual meeting of the Institute of International Bankers in Washington.  The Journal of Accountancy published an article on the speech on March 5, 2009.

If I could dig up a speech given by the head of the Office of Thrift Supervision from the mid-80′s it would sound a lot like this speech given last week.  Back in the 80′s accountants had to deal with Regulatory Accounting Principles (RAP) as well as Generally Accepted Accounting Principles (GAAP).  RAP would allow savings and loans to defer losses on their books creating fake capital where GAAP would require them to write them off.  We called this RAAP/GAAP differences.

We all know how the S & L story ended and we shouldn’t repeat those mistakes.  I think it is important to stop discussing how the accounting rules should be changed and focus instead on nursing the banking industry back to health.  Just changing the accounting rules doesn’t change the underlying health of a company.  The issue regarding the proper amount that banks should have reserved today has more to do with appraisal issues surrounding the underlying collateral than accounting rules.  A lot of the collateral is not being traded anymore and in the case of land and development loans, residential lots are not moving as fast as the original appraisals assumed.

It appears the regulators are still confused about the fact that the allowance for loan losses is intended to recognize losses in the loan portfolio today.  Future losses should be accounted for by increasing capital.  To recognize future losses in the allowance for loan loss account because the underlying collateral is hard to value would be taking a step backwards towards eliminating the RAP/GAAP difference in the allowance for loan losses.

In a conference call this afternoon, FDIC Chairman Sheila Bair acknowledged that there has been a very strong (and negative) reaction among bankers to the FDIC Board’s decision to impose a special assessment against banks to replenish the Deposit Insurance Fund. Importantly, Bair noted that the Agency has established a 30-day comment period. She said the agency specifically asks for comments on charging larger banks a higher proportionate amount in terms of the special assessment by using assets rather than deposits as a basis for its calculation.

Bair stated that the FDIC staff has projected $65 billion in losses to the DIF through 2013, and the losses will be “front-loaded,” i.e., they will occur and cost the DIF more money in 2009 and 2010 than in the out years. She told more than 150 bankers and state association executives on the call that the Board considered a number of options but took the action it did to “avert what would have been a public relations disaster.” She acknowledged that the decision – announced Friday – has caused a lot of shock across the banking industry and that it will cause some bankers a great deal of pain.

The chairman noted that FDIC’s current borrowing authority from the Treasury Department is limited to $30 billion. In explaining why the Board declined to exercise that borrowing authority, Bair told the bankers that FDIC is currently trying to raise its borrowing authority to $100 billion in the 111th Congress, and members of the House and Senate have indicated they would not be supportive of raising the borrowing limit if the FDIC drew on its current authority.

Bair also noted that if the FDIC used up the total of its borrowing authority now, it would not leave the agency with any alternatives in the event a large institution had to be closed and liquidated. She also said, in her opinion, it would be further bad news for the banking industry and would paint all banks with the “bailout brush” and perhaps even expose bankers to more Congressional oversight.

Art Burton, a staff member at the FDIC also commented that staff has looked at a number of different options to get the Reserve (DIF) fund back to its statutory position. Without the special assessment and the increase in deposit insurance premiums, the DIF stands a chance of going to zero before the end of the year.

Bair did point out that losses to the Fund are not coming from the too-big-to-fail banks, but rather are coming from the medium-sized and smaller banks that were heavily involved in commercial real estate development.

Several times during the conversation the chairman emphasized the Agency’s need to raise money “soon.”

“Several of us zeroed in on at least two different approaches,” said OBA President and CEO Roger Beverage. “One approach would be to require banks to pay the money up front but permit them to amortize it over a period of up to 10 years. Another would be to borrow from the industry by creating a bond issue similar to the FICO bonds used during the S & L collapse and allow banks to pay off the bonds over time.

“The FDIC staff indicated that accounting rules would prohibit either of these suggestions because the need is for cash in the DIF or the reserves immediately, and the only way to get that accomplished is to require the full payment of the special assessment all at once. I’m not an accountant, and I will defer to the experts, but it seems to me that we should be able to think of a way to wire around such restrictions on a temporary basis in order to accommodate both the FDIC’s immediate need and the bankers’ need to account for the payment over time.”

Beverage noted that there is also authority in the Interim Rule for an additional 10 basis point assessment if, in the judgment of the FDIC Board, the reserve ratio for the DIF is estimated to “fall to a level … the Board believes would adversely affect public confidence or to a level” that would be close to zero or negative at the end of a Quarter.

Bair also noted the difficulty of changing the current mindset of Congress and the general public, which is more “anti-bank” than in past years. Congress is simply tired of being in the “bailout business” and paying for things.

In response to a banker question, Bair also noted that “bidding up” the cost of deposits is something the Agency is trying to combat. She indicated that FDIC is trying to come up with a “market rate” analysis that would force high bidders to justify their actions to the banking Agency.

Unfortunately, there doesn’t appear to be a “Plan B” at this point. Current authority to borrow up to $100 billion for short-term working capital does not relieve the pressure on the FDIC Board to building the DIF reserve, according to the chairman.