OTS: Failure Prevention Must Be Improved
WASHINGTON - Federal regulators' power to seize troubled banks and thrifts is not sufficient to prevent an episode of failures and deposit insurance fund losses rivaling those of the late 1980s, Office of Thrift Supervision Director Ellen Seidman said Wednesday.So-called "prompt corrective action" often comes too late, she said, especially when a bank holds a high concentration of residual securitized loans, engages in off-balance-sheet activities and capital arbitrage, outsources vital bank functions, or actively interferes with the regulatory process.
"With prompt corrective action, our ability to control risk has been strengthened considerably - or has it," Ms. Seidman said at a speech sponsored by the Exchequer Club. "In some ways, that's the $64,000 - or is it the $64 billion - question."
Ms. Seidman said regulators also must consider the external factors affectintg bank performance.
"The real nightmare occurs when exogenous forces couple with these trends to cause a wave of major failures," Ms. Seidman said.
Those forces might include severe deflation, deteriorating credit quality, sharply rising interest rates, or other unforeseen shocks to the financial system.
"Any of these scenarios could, in the extreme, result in widespread bank and thrift insolvencies and insurance fund losses - despite the safeguards embedded in prompt corrective action," she said.
The Federal Deposit Insurance Corp. Improvement Act of 1991 established prompt corrective action so regulators could impose increasingly severe penalties on an institution as its capital declines. Once equity sinks below 2% of assets, regulators may seize the institution.
Though Ms. Seidman said she is inclined to think that the nightmare scenarios will not occur, regulators have already begun to take steps to augment prompt corrective action.
For instance, increased emphasis is being placed on the use of internal risk management systems, and institutions are being encouraged to disclose more information about their operations, Ms. Seidman said.
Additionally, risk-based capital rules are being overhauled to focus more on the risks of off-balance-sheet activity.
"I believe that bank and thrift regulators already are doing many of the things we should be doing," Ms. Seidman said. "In some cases we may need to do them more forcefully, or more demonstratively, or simply better. But I think we are on the right track."
Poll Says Privacy Compliance Will Be a Chore
WASHINGTON - With the privacy provisions of the Gramm-Leach-Bliley Act of 1999 due to take effect in November 2000, 62% of bankers say they believe compliance will be either "somewhat difficult" or "very difficult," a KPMG survey found.Nearly half the officials said they have no companywide privacy policy in place.
"The main message here is that there is no time to lose," JoAnn Barefoot, a partner with KPMG, said. "The industry has a lot of work to do and the clock is ticking."
The consulting firm's survey also found that in most banks the responsibility for privacy policies is housed in the information technology department (31%) or the compliance department (26%).
Fifty percent of respondents said they believe their bank will develop its own privacy policy, while 40% expected their bank to create policy based on evolving best practices. Asked to identify the most significant privacy risk their institutions face, 46% said "adverse customer relations" and 22% "brand damage."
The survey was completed by 148 respondents among bankers attending the Bank Administration Institute's Retail Delivery Systems conference last week.
- Rob Garver
