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Advocacy Alert- 06/10/2002

DFI Terrorism Regulations

In a recent bulletin from California's Department of Financial Institutions, it has been made clear that all licensees will be forced to take extraordinary actions to protect against terrorism. Among the mandates:

• Board review of personnel policies, including hiring policies and background checks, with a resolution regarding same to be sent to the DFI.

• Board review of contingency planning and business resumption plans, with a resolution regarding same also to be sent to the DFI

• Board approval of a contact person for receipt of notices from DFI regarding alerts and threats to financial institutions in California.

Please review the DFI bulletin (May, 2002) for more information and compliance requirements.

Bad Debt: Update

As previously reported in the Current Events dated May 20th, the Governor's May Revision of the State Budget contained "conformity" to federal law governing the treatment of bad debt reserves for "large" banks. This would effectively require banks with $500 million in assets or more to recapture their bad debt reserves as income and switch to the specific charge-off method.

The estimated revenue hit on the banking industry for the 2002-2003 fiscal year is $255 million and $185 for the 2003-2004 fiscal year. When contacted about this, the governor's staff expressed surprise over the inclusion of this item. As the governor's staff explored this further they informed us that this item was put forward by the Franchise Tax Board (FTB). The Governor's Office also apologized for allowing this issue to be included in an official public document without talking with the industry first.

In an effort to resolve the issue the Governor's Office called to set a meeting with CBA on Monday, June 10, at 4:00 p.m., with the Department of Finance, the FTB and key administration officials to discuss the matter. The fact that the Governor's Office wants to meet is a very positive sign. If they were trying to "jam" the industry there would be no purpose in meeting with us. We are hopeful that this meeting will lead to an equitable resolution of the issue. Discussions with the FTB today indicate that there may be other members of the Legislature that want to pursue this issue as separate legislation, apart from the budget. If we can separate this issue from a $23.6 billion budget deficit, our chances of prevailing are very good.

We have included bad debt as one of the issues that bankers are discussing when they meet with legislators. We will provide you with an update early next week on our progress. If you have any questions, please contact Jamie Clark at jclark@calbankers.com.

OMB tells OFHEO to make housing GSEs provide
SEC-like disclosures

OMB is demanding that OFHEO require Fannie Mae and Freddie Mac to provide investment disclosures "at least as stringent" as those required by the SEC. OFHEO is the safety and soundness regulator of the giant housing GSEs.

A bill pending in the House would repeal exemptions Fannie and Freddie are currently accorded from SEC registration requirements, and OMB's action is aimed at heading off that legislation. But the authors of the legislation, Reps.Chris Shays (R- Conn.) and Ed Markey (D-Mass) are skeptical. They fired off their own letter to OFHEO which was scornful of the GSE regulator and questioned whether OFHEO "has the sufficient legal authority, staffing or expertise" to develop an adequate public disclosure policy with which the giant GSEs must comply.

Meanwhile, it is expected that Treasury Undersecretary for Domestic Finance Peter Fisher will appear later this month before a House subcommittee (chaired by Rep. Richard Baker, R-La.) to outline the administration's views on GSEs. It will be the first time the Bush administration has articulated a comprehensive GSE policy.

FDIC insurance reform update

CBO released a study requested by Sen. Phil Gramm, ranking member of the Senate Banking Committee that concludes that a $30,000 increase in the general deposit insurance ceiling is not likely to help small banks significantly, given the cost associated with it, and that it is unlikely to attract many new deposits. The question is whether it improves the Senate outlook for FDIC reform legislation that passed the House overwhelmingly two weeks ago. So far it has not.

The Independent Community Bankers of America are the principal proponents of a ceiling increase. America's Community Bankers have been advocates of a ceiling increase, but ACB's enthusiasm waned once the costs of the increase became apparent. Thus far there is no indication yet that ICBA's position favoring a ceiling increase has changed.

But despite conventional wisdom, FDIC Chairman Don Powell remains optimistic that the legislation will get through the Senate, as he indicated in a speech this week. One reason is that he has a pretty good idea now what the first quarter BIF ratio, scheduled for public release on June 11, is going to be. It could be a shocker because it will be the first time insured deposits will include the full coverage on pass-through (trust) deposits. Previously, each pass-through account was counted only to the extent of $100,000. One analyst predicted that insured deposits could swell by as much as 15 percent owing to the change in call report instructions alone.

FDIC staff, speaking off the record this week, said the number would be under 5 percent, but that there could be a substantial increase in insured deposits. If so, the BIF ratio will fall below 1.25 percent, perhaps well below. Faced with the reality of significant premiums next year, the deposit reform bill might look more attractive even to ICBA policy makers, given the credits it provides to previous premium payers.

House Financial Services approves reg relief bill despite banker reservations

Credit unions were the big winners in a bill providing regulatory relief for the financial services sector that was approved Thursday by The House Financial Services Committee. The legislation would remove all statutory limits on the amount of automobile and small business lending a federally chartered thrift could do, and general business lending authority would be increased to 20 percent of assets.

The bill also broadens the out-of-state branching authority of both state and national banks. But credit unions would be permitted to make unlimited amounts of loans to non-profit religious groups, and non-federally insured credit unions would be authorized to join Federal Home Loan Banks. Moreover, very large credit unions with fields of membership in excess of 3,000 would be granted the authority to merge, voluntarily with other credit unions.

Before the action, CBA president Gary Gertz wrote the seven Californians who are members of the Financial Services Committee indicating that CBA could not support the legislation. Said the letter: "The competitive imbalance between large credit unions with highly diverse fields of membership and smaller, community oriented banks and thrifts would be so exacerbated that (CBA) simply cannot support (the legislation)."

Nonetheless, California Members Ed Royce, Gary Miller and Brad Sherman, spoke in favor of the unlimited loans to religious groups provision and these three, along with Rep. Doug Ose, voted against a motion to strike the provision allowing non-federally insured credit unions to join Home Loan Banks. The other three Californians, Reps. Chris Cox, Maxine Waters and Barbara Lee did not take part in the credit union discussions and did not vote.

Update on CBA's Grassroots Program

As you know by now, CBA has begun work on revamping its Grassroots Program. As the name suggests, "grassroots" means cultivating relationships "from the ground, up." With this in mind, the initial part of CBA's Grassroots Program deals almost exclusively with putting CBA members in contact with their elected officials in these legislators' district offices.

CBA has already held several meetings and the response back from legislators has been incredible.

All of the legislators CBA has met with over the past few weeks has expressed genuine appreciation for the opportunity to meet with the banking industry, and has indicated that they don't want these meetings to be "one-time" deals. They are expecting to see the banking industry, specifically CBA members, in their offices on a regular basis.

The following meetings have been scheduled between CBA members and their elected officials. If you would like more information on these meetings, or would like to participate in any of the meetings, please contact Mary Maybie at (916) 441-7377, ext. 207. If you are not available, please consider sending an officer from your institution.

* Luncheon following from 12:00 noon to 1:30 p.m. at the Mission Inn in Riverside.
** Rescheduled June 7, 2002 meeting date
*** Rescheduled June 21, 2002 meeting date