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Beefing up state regulation

Northwestern Financial Review, Jun 1-Jun 14, 2003 by Dullum, Justin

States work to maintain key role in bank regulatory system

The United States is unique for its dual banking system an arrangement in which a national authority regulates some banks and a state authority regulates others. Advocates for the system say the states are innovative laboratories where ideas can be tested with minimal risk before being expanded if proven beneficial. Bankers seem to like the approach, especially in the Upper Midwest where a majority of banks hold a state charter.

In many states, it appears that banks are even willing to pay a little more to maintain the quality of their state system of regulation - although they will still pay a lot less than if they were regulated by the federal authority, the Office of the Comptroller of the Currency.

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With intensive competition between state and federal agencies for experienced examiners, some states are struggling to keep their best personnel. As a result, these states are increasing examiner compensation. Since most state banking agencies are funded by exam fees, banks are footing a larger bill.

The Nebraska legislature has passed a bill that allows financial institution examiners to reclassify themselves as 'at-wiir employees and remove themselves from participation in the state personnel system-a pay structure in which compensation is based on title and seniority. The new law, which has been signed by the governor, allows the Nebraska Department of Banking and Finance to pay examiners independently of what is otherwise dictated for state employees.

Under the bill, the salaries of examiners would be set by the banking and insurance department directors and approved by the Governor. The state regulator's office believes this act will help it to attract high quality employees and retain its examiners. Texas and Florida are the only two other states with laws permitting this kind of compensation for examiners.

"We started looking at surrounding state and federal regulators and did some salary comparisons," said Laura Larson, Nebraska Department of Banking and Finance. "What we discovered was we believed our rates within the state personnel system were lower than what they should be. We want to retain our examiners rather than have them go off to another state or to a federal agency."

The Nebraska Bankers Association supported the effort. "We want to make sure we have qualified examiners, whether they're at the start of their career or we're retaining examiners who know how to help bankers run their shops more effectively," said Robert Hallstrom, NBA general counsel.

Other states have taken similar measures. A year ago, the Montana legislature approved a measure to allow the state's banking authority to increase examiner compensation.

"Montana has had difficulty keeping examiners employed. Once they've acquired the necessary skills and education, they become attractive to the private sector," said Annie Goodwin, Montana Commissioner of Banking. "We adopted a compensation method based on that of private corporations and we've seen positive results."

Goodwin said the state hasn't hired a new examiner in more than two years. "We've been able to keep our examiners happy," said Goodwin. "We're keeping turnover low and I see us maintaining that."

Montana banking groups, like their Nebraska peers, supported the change-even though it will ultimately translate to increased exam fees.

"We unanimously supported the appropriations request," said John Cadby, Montana Bankers Association president. "The problem with state examiners is they're always attracted to more money from the Feds or a private company. It's important to keep trained and experienced examiners in the state."

Cadby said Montana banks pay about 90 percent of the state examiner's budget. When the bill was passed, the department had enough reserves to cover salary increases without having to raise exam fees. When this reserve runs out, banks will be faced with increased fees. "We know it will cost a little more to keep these people around. But state chartered banks feel strongly that the state office should be an effective agency with the highest level of professionalism," Cadby said.

Oklahoma bankers recently supported legislation that will make their state banking agency self-funded. Oklahoma had been one of a handful of states without a self-funded agency. The state banking agency has consistently generated more revenue for Oklahoma's general fund than the legislature would appropriate for the agency's budget. Oklahoma Banking Commissioner Mick Thompson said his department's desire to keep what it earned was fueled by a need to retain examiners.

"We didn't have the flexibility to keep examiner salaries competitive. Now, if we need to raise salaries, we approach the industry," said Thompson. "My board is made up of five bankers. If I convince them we need to increase exam fees, the industry can fund its own needs. The people who pay the tab use the service."

Focusing on risk

Bankers sometimes acknowledge the value of the "second opinion" a regulator can offer about the operation of their bank. And, increasingly, examiners are focusing on the most vulnerable parts of the operation. Risk analysis has become the examiner's byword, allowing them to apply the most resources to the areas that pose the greatest potential risks.

Beefing up state regulation

Northwestern Financial Review, Jun 1-Jun 14, 2003 by Dullum, Justin

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