The Maryland Department of Financial Regulation expects legislation to be introduced this week in the General Assembly that would increase its funding and re-sources and, it hopes, better prepare it for an Allfirst-like debacle.
The Department is recommending increasing application fees, allowing it to hire contracted examiners, and improving the salary scale for full-time examiners. Most importantly, it wants to create a separate fund for the assessment fees it collects from financial institutions. Currently its revenue - $9.4 million in fiscal year 2002 - goes straight to the state's general fund and is allocated back out to the Department.
Commissioner Mary Louise Preis says she is hopeful that, since it would not take away funding from other state departments, the proposal has a chance of becoming law, even though Maryland - like most other states - is facing its largest budget crisis in years.
"I know it's a difficult year for the legislature, but in the long term this provides us with more financial support, and in the short term it will not be harmful to the general fund," Ms. Preis said.
A portion of the Department's revenue, such as fines and penalties, would still end up back in the general fund, Ms. Preis noted in an interview last week.
The recommendations came out of a report, released in December by her agency and the Maryland Department of Budget and Management, on how the Financial Department's staff, salary examination fees, and budget compared with those of its counterparts in other states. The report, which was ordered in April 2002 during the Allfirst scandal, also looks at why the Department was ill prepared for it.
In February 2002 investigators discovered that a currency trader at Allfirst Banks Inc. had lost $691 million making bogus trades over the course of five years. Many observers have said that the Financial Department could not handle a $18 billion-asset bank like Allfirst - which converted to a state charter in 1998 - and that the fraud continued for so long because of a lack of supervision.
The Allied Irish Banks PLC unit has about one-third of Maryland's state-chartered banks' assets. When the fraud examination began, most of the Department's examiners and resources were involved, and less attention was being paid to other state banks, Ms. Preis said.
"I think some in the legislature may have been concerned that we did not have experienced financial examiners to sufficiently handle the problem," she said.
The other reason for the review, according to the report, was because last year the Department stopped accepting new bank charters and conversions, because it did not have the funds or staff to adequately supervise new institutions.
Kathleen Murphy, the chief executive officer of the Maryland Bankers Association, said the state-chartered banks became very concerned when that happened. "That's when the red flags went up. Bankers started to wonder what pressures were so strong to require a moratorium."
Allfirst's pending purchase by M&T Bank Corp. of Buffalo should free up some resources. But Ms. Preis noted that Allfirst generates about $1.4 million of revenue for the Department and that, with the moratorium lifted, more bank charters are in the pipeline.
The Financial Department is proposing that all of its assessment fees, as well as the licensing fees it collects from nondepository institutions, go into a Financial Regulations Fund. The Department would still spend only the amount that the General Assembly approves, but Ms. Preis is hoping that its budget would increase, since it would be based upon how much is in the fund. Currently the budget is not keeping pace with the increasing revenue, she said.
The Department also hopes to increase its application fees for certain bank activities, a move that Ms. Murphy said bankers would not oppose, because Maryland's fees are among the lowest in the country. The application fee for a new bank charter in Maryland is $1,500, compared with $10,000 in Virginia and $15,000 in New Jersey.
The proposal also recommends raising the 18 examiners' salaries to make them on par with those in other states. While their starting salaries are comparable to those in most East Coast states, the average salaries for more senior positions are drastically different and have prompted six of the eight examiners hired since 1999 to leave.
The average salary for a chief bank examiner in Maryland is $66,000, nearly half of what it is for the same position at the Federal Deposit Insurance Corp.
Ms. Preis, however, said that, instead of hiring extra examiners, her agency should simply have the authority to borrow examiners from other states and hire other experts on a contract basis when examining larger banks or when trouble comes.