NEW ORLEANS — Add strategic planning to the lengthy list of items regulators are scrutinizing during the bank examination process.
In addition to credit quality, interest rate risk and cybersecurity, examiners are also pressing bankers to validate the viability of their business plans, according to a Tuesday panel of regulators at this year's Independent Community Bankers of America conference.
"What is your business viability?" Toney Bland, senior deputy comptroller for midsize and community bank supervision at the Office of the Comptroller of the Currency, asked attendees. "What is the right model for a community bank? Not that there is one model, but what thoughts or considerations are you giving to that?"
The need for strategic planning has become more important as banks endure intense competition, emerging technology, added regulations and low rates. Bankers need to think about the "value proposition" their institution provides, "given the different sources of credit for consumers," Bland said.
Strategic plans, which usually cover three to five years, are the "road map on where your bank is going in terms of growth," Robert Flowers, a lawyer at Hunton & Williams, said during a Monday session about capital and acquisitions. Such planning is then used to guide enterprise risk management and capital planning, an essential process for all banks regardless of their degree of health.
"Regulators want to see that strategic planning," Flowers said.
Marketplace lending, which has become a competitive threat to banking, is an area where strategic planning should be important, the regulators said.
Marketplace lenders "are something institutions need to be aware of," Bland warned, adding that bankers need to take "a longer-term view" of that business. Banks still have an edge over online lenders because of their customer relationships, Bland said before encouraging bankers to use technology to help leverage that advantage.
The panel's moderator, Christopher Cole, the ICBA's senior regulatory counsel, asked the audience if anyone was thinking about working with an online lender, but no one raised their hands. Rather, attendees were more focused on credit unions, identifying the tax-exempt institutions as the stiffer competition.
Bankers' plans for using vendors and other types of business partners also merit scrutiny, the regulators said.
Banks, which are ultimately responsible for a third-party provider's actions, need to carefully vet any outside firm they work with, said Doreen Eberley, director of the division of risk management supervision at the Federal Deposit Insurance Corp.
"It doesn't matter whether its marketplace lending or whatever kind of lending it is," Eberley said. "Anytime an institution is engaged in lending through a third party, it raises different issues."
The panel also addressed risks in commercial real estate lending. Federal banking regulators issued a joint statement in December that warned of a significant rise in CRE loans that could include more relaxed underwriting.
"We have observed some increases in lending activity, particularly in construction lending," said Kevin Bertsch, associate director of the Federal Reserve Board's banking supervision and regulation division. "We don't want to overemphasize it, but we want to remind bankers if they develop concentrations they must have appropriate risk management."
Eberley said she wanted to do some myth busting by asserting that there are no concentration limits for loans. Rather, bankers need to maintain stronger risk management processes if they plan to go beyond concentration thresholds preferred by regulators.
"Community banks, by definition, are going to be concentrated," Eberley said. "Underwriting is key. We have been refocusing our conversations around concentration to discuss the strength of those credits."
Despite a series of serious topics, the panel managed to have a few lighthearted moments. When asked about moving community banks to a two-year exam cycle, instead of the current 12- or 18-month system, Bland deadpanned a quick "no" response that drew a chuckle from the crowd.
"That was a lesson from the 1980s," Eberley added.
Cole then said he wanted to let Bland respond to the question.
"No, I said no," Bland said, drawing additional laughter from the crowd.