CALIFORNIA BAR ASSOCIATION

Financial Institutions Committee &

Consumer Financial Services Committee “Legislative Day”

“What Every Lawyer Should Know About Prudential Regulation of Banks”

 April 9, 2013Sacramento, California

Teveia R. BarnesCommissioner

State of California Department of Financial Institutions

DFI Licensees

For over 100 years, the California Department of Financial Institutions (DFI) has overseen the operations of state chartered banks.

DFI also examines and supervises: State Chartered Credit Unions State Chartered Savings Associations State Chartered Trust Companies Foreign banks (Other States and Nations) Business and Industrial Development Corporations Money Transmitters (Western Union, Xoom, PayPal,

Google, Facebook & Square)

DFI’s Mission and VisionsMissionTo protect and serve California’s citizens through

the effective regulation and supervision of financial institutions licensed by the Department.

VisionThe Department will be a leader in the regulation

and supervision of the financial services system.We will meet the challenges of our changing

environment and foster public confidence and trust in the financial services system by maintaining an enhanced professional staff.

DFI’s Vision

To restore the public’s trust and confidence in banks by ensuring that the people of California are protected.

To return to the days when bankers were pillars in the community, because bankers were worthy of the public’s trust and confidence.

Duties of DFI Encompass: Granting of licenses to conduct banks business in the

State  Approval of banks 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

Closure and liquidation (Death Penalty vs. Resurrection)

Examination and Supervision

The terms “supervision" and “examination" have come to be used interchangeably.

The examination is the foundation of supervision.

Supervision is what ensures the safety and soundness of the financial system.

Supervision of Bank Management

Supervision involves the evaluation of the abilities of bank management.

Supervision techniques (best practices) are used by DFI to strengthen or replace management,

If management demonstrates the inability to effectively direct the activities of the bank or

If the continued viability of the bank is threatened

Delicate Balance of Bank Supervision

Supervision by DFI involves the evaluation of the abilities of the board of directors and management.

Supervision by DFI does not involve micro management of banks.

Avoid the Unpardonable Sin

To be effective, DFI must scrupulously avoid imposing corrective measures "too quickly" and which are "too great".

DFI must be even more alert to avoid the unpardonable sin of doing "too little too late". (Telesis: Office of the Inspector General.

March 19, 2012 and March 23, 2012)

Risk Focused Supervision

Effective enterprise risk management has always been central to safe and sound banks activities

Risk management has become more important as new technologies, product innovation, and the size and speed of bank transactions have changed the nature of bank in the banking markets.

Trust But Verify

The DFI examiner focuses on validating banks management’s ability to identify, measure, monitor, and control risks.

Internal audits, external audits, loan review, and other control activities are integral to a bank’s own assessment of its risk profile.

Its About CharacterThe capability of the board of directors and

management to conduct the affairs of the bank with candor, personal honesty and integrity, coupled with their establishment of a

strong risk management framework are the most important component to the

success of the institution.

Conservative Bank = Successful Bank

Strength of balance sheet and strength of character are one in the same. Bankers who have learned from others mistakes.

Banks that are operated in a safe and sound manner, have management that exhibits a clear understanding of:mission, vision, and values; impact of the environment on the bank; culture;strengths, weaknesses, opportunities, and

threats;goals to be accomplished in the future

(Strategic Plan)Management is pro active in safety and

soundness

Pro Active Management Pro active in developing:

the products and services the bank is willing to provide; 

an organizational design and the roles that are needed by the organization;

an enterprise risk management framework supported by strong policies and procedures;

performance goals and resources needed to reach those goals and consequently, how much money is needed to procure those resources

Sound Management

Sound management practices are demonstrated by:active oversight by the board of directors and

management; competent personnel; adequate policies,

processes, and controls taking into consideration the size and sophistication of the institution;

maintenance of an appropriate audit program and internal control environment; and

effective risk monitoring and management information systems.

Internal ControlsInternal controls must be designed for each type

of activity in which the banks is engaged.

Internal controls ensure the effectiveness and efficiency of the operation, the reliability of financial data, and compliance with established policies and procedures and laws and regulations.

Perform an assessment of each activity to identify the types of risks to which the banks will be exposed.

Once risks are identified, must determine controls to reduce the risk.

Levels of Internal Controls Required

Approvals and/or authorizations prior to completing a transaction.

Separation of duties. One individual should not have control of a transaction from start to finish.

Periodic review of the activities. Monthly or quarterly certification requirements

or subject the activity to a periodic audit by outside auditors.

 Periodic review of accounting procedures. Establish a means to monitor performance.iCAMELS

Enforcement ActionsBoard 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.

Enforcement ActionsRegulatory 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.

Enforcement ActionsCease & 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, EmployeesMay provide for an immediate removal order

under certain specific circumstances.

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.

Enforcement Actions in 2012 & 2013

In 2012 24 state chartered banks were the subject of enforcement actions:6 Cease and Desist orders3 Board Resolutions15 Memorandums of Understanding

March 29, 2013 First Final Order Published on DFI Website (FC 583)

Story of ValetIn 2012 34 state chartered banks enforcement

actions were lifted:12 Cease and Desist Orders4 Board Resolutions18 Memorandums of Understanding.

We are on the right path:

to restore the public’s trust and confidence in banks by ensuring that the people of California are protected.

to return to the days when bankers were pillars in the community, because bankers were worthy of the public’s trust and confidence.