Safe and Sound Banking Teveia R. Barnes Commissioner State of California Department of Financial Institutions Sustainable Banking Seminar Stanford University

Safe & Sound Banking - Stanford CEE 244A

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Safe and Sound Banking

Teveia R. BarnesCommissionerState of California Department of Financial Institutions

Sustainable Banking SeminarStanford University April 3, 2013

April 3, 2013


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DFI as Prudential Regulator

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

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Changes Among State Banks2012

# $

Thousands

State Banks & Total Assets as of 1/1/12 186 271,593,744 # Failed 0 0 # Merged out of business (9) (1,890,267) # Converted to national charter 0 0 # Ceased doing business (1) (25,902) # Opened 0 0 # Converted to state charter 2 1,173,470 State banks that acquired other banks 2 33,066 State banks that did not acquire other banks 174 19,447,297

State Banks & Total Assets as of 12/31/12 178 290,331,408 Net change: (8) 18,737,664

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Changes Among State Banks2012

State Banks & Total Assets as of 1/1/12 # Failed # Merged out of business # Converted to national charter # Ceased doing business # Opened # Converted to state charter State banks that acquired other banks State banks that did not acquire other banks

Changes in State Banks (# of banks)

State Banks & Total Assets as of 1/1/12 # Failed # Merged out of business # Converted to national charter # Ceased doing business # Opened # Converted to state charter

Changes in State Bank Assets ($ Thou-sands)

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Changes Among State Banks 2005 – 2012

#$

Thousands

State Banks & Total Assets as of 1/1/05 189 172,470,243 # Failed (23) (33,137,711) # Merged out of business (63) (24,766,060) # Converted to national charter (2) (4,456,770) # Ceased doing business (4) (7,808,923) # Opened 71 57,649,244 # Converted to state charter 10 16,979,061 State banks that acquired other banks 23 69,909,822 State banks that did not acquire other banks 107 43,492,502 State Banks & Total Assets as of 12/31/12 178 290,331,408 Net change (11) 117,861,165

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Changes Among State Banks2005 - 2012

State Banks & Total Assets as of 1/1/05 # Failed # Merged out of business # Converted to national charter # Ceased doing business # Opened # Converted to state charter State banks that acquired other banks State banks that did not acquire other banks

Changes in State Banks (# of banks)

State Banks & Total Assets as of 1/1/05 # Failed # Merged out of business # Converted to national charter # Ceased doing business # Opened # Converted to state charter

Changes in State Bank Assets ($ Thousands)

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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

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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

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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.

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CAMELS

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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

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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

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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.

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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.

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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.

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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.

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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.

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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

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Examination Trends

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1 2 3 4 5none

Declining

Stable

Improving

5 0 0 1 1 4

1

0

0

0 25 29

0

Note: 2 institutions have not yet been assigned a rating

0

CURRENT RATING

1 0 0 0

1 0 0 00

2

3 0

00

PR

IOR

RA

TIN

G 4 0 0 6 15

92 1

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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.

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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.

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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.

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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.

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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.

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Enforcement Actions in 2012

Cease & Desist Orders Board Resolutions Memo of Understanding0

2

4

6

8

10

12

14

16

18

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Issued Lifted

April 3, 2013

Documents

Safe and Sound Banking Teveia R. Barnes Commissioner State of California Department of Financial Institutions Sustainable Banking Seminar Stanford University