Superintendent Neiman Addresses the Independent Bankers Association
of New York Annual Conference, Ellicottville, NY
September 10, 2007
Good morning and thank you Jim for that kind introduction. I also want to thank the Independent Bankers Association of New York State for inviting me to speak at the convention today.
This is an especially exciting time to be part of the banking industry in our state. I say that even though there are real challenges facing the industry in general- consolidation, preemption, and turmoil in the mortgage sector - and the situation in New York is no exception. But there are also unique economic opportunities that community banks are particularly suited to realize.
I look forward to discussing those opportunities with you, both in the short time we have together this morning and in continuing conversations one-on-one. I also want to share with you my priorities for the Department and perspectives on the future. I am dedicated to making the state charter even more responsive to your needs, so that community banks in New York are positioned to succeed in a world of changing market dynamics.
New York is the hub for the finance industry, and so it’s particularly important for banks and regulators in our state to identify opportunities and emerging trends. We need to continue to foster our historic competitiveness and entrepreneurial spirit.
A. The Role of Community Banks in Economic Development
This convention is one means of doing just that - of taking stock of where we are as an industry here in New York, to ensure that we are positioned to maintain our edge and continue maximizing new economic opportunities.
And I am pleased to be able to say that the position of the community banking industry in this state is strong and healthy, even in the midst of what is otherwise a time of increased market uncertainty. The number and diversity of banks that might fit under the umbrella of a “community bank” is one reason for this robustness. In considering banks with deposits under $1 billion, there are 165 institutions with their headquarters in New York. More than half of those banks are under the Department’s supervision, and that number is growing. For example, we’ve seen a recent surge in the number of new community banks: this year alone, we already have four approvals, and another five applications are in the pipeline.
That’s a substantial volume of new charter activity compared to past years, and I’d like to highlight two primary factors that I see as contributing to this successful growth. These points also demonstrate how community banks can use their position to positively affect economic development throughout the state.
- First, community banks are thriving because you have been innovative in identifying untapped or underserved markets . Community banks have always been close to their customer base, and this has helped to identify new areas for growth. And the trend toward increased consolidation in the industry, while it has increased your competitive pressures, has also exposed new niche opportunities. Community banks have adapted profitably by pursuing emerging markets that larger consolidated lenders may have bypassed. For example, a number of our new banks were formed to meet the needs of underserved ethnic or immigrant groups. That shows how community banks and the diverse New York population can succeed together.
- A second factor contributing to your successful growth is that community banks have taken a measured approach to risk . Community banks historically tend to take a conservative stance on risk management and underwriting standards. While high-risk, alternative mortgage products have been a fad, community banks largely steered clear of these underwriting experiments that led to the current subprime problem. As a result, our community banks’ financial condition is robust. Although all financial institutions are experiencing general negative effects of the capital market’s reaction to some degree. Nevertheless, because of your solid position, I see community banks as prepared to contribute to the solution to the subprime situation. One important means is by continuing to offer affordable mortgages to consumers, especially those who may be facing a payment reset and are looking to refinance into a more traditional fixed rate product. The Department is looking to encourage that process, and offers CRA credit to banks that develop products designed to help consumers who are experiencing a mortgage hardship but who could qualify for a loan on responsible terms.
CRA credit is only one example of ways in which the Department is looking to partner with you in fostering a vital and engaged role for community banks in economic development.
B. The Department’s Support of Community Banks
I’d like to dig deeper into four of my priorities which I believe will promote economic expansion, add value to our supervised institutions, and assist community banks in capturing new business opportunities. The priorities are specifically aimed at supporting community banks by:
- by offering innovative programs and incentives;
- by optimizing the benefits of our supervisory oversight;
- by working to ensure parity between charter types; and
- by continuing to modernize our regulatory framework.
- Innovative Programs and Incentives
We have several programs to expand access to traditional banking services and promote safe and affordable credit choices.
a. The Banking Development District (BDD) Program. The Department offers incentives to banks that open branches in areas identified as under-served, and the state comptroller places deposits of up to $10 million at BDD branches at below-market rates. The program is just one more reward for engaging in the type of work that community banks do so well- exploring the dynamics of a local economy, identifying those pockets where unmet needs exist, and growing by filling those needs with the kind of personal service that is your hallmark. The program has been operating predominantly downstate and in Buffalo, but one of my priorities for the Department is to take the success that we’ve had with the BDD program and see it implemented more fully upstate. I hope to hear from you, with proposals for reaching a broader range of rural and other underserved communities.
b. Small-dollar loans . In addition to expanding the BDD program geographically, we’re also looking to expand the scope of the program by encouraging certain loan products. I’ve had preliminary discussions with both the state and New York City Comptrollers, about granting additional incentives for BDD branches that offer small-dollar loans or micro-credit. There is a pressing consumer need for low-balance loans on responsible terms, as an alternative to high-cost credit cards.
c. The Community Bank Deposit Program is a state initiative in which the State Comptroller and the Commissioner of Taxation and Finance have an aggregate of $250 million of funds under their control available for deposit with eligible community banks. The Banking Department will be playing a key role is setting those eligibility standards, and I expect they will likely include an evaluation of factors such as:
In a very competitive environment, those state deposits can make a real difference in your profitability. And we’re in discussion with the Comptroller’s office, to ensure that the available funds are targeted to maximize their impact.
- The bank’s loan-to-deposit ratio;
- The bank’s CRA rating;
- The bank’s record of small business lending; and
- The impact the deposits will have on the local econom
The Community Bank Deposit Program is just one more example of the state’s commitment to your success- and by rewarding good business behaviors the Program benefits all New Yorkers. It’s a win-win situation.
2. Optimizing the Benefits of our Supervisory Oversight
But good programs alone aren’t enough- as regulator we also need to provide room for you to innovate within clear guidelines by reducing regulatory burden. I’m not suggesting laxity in standards. What I am suggesting is that the right amount of regulation promotes responsible economic growth rather than stifling it.
a. Prudential supervision and enforcement
I see the Department having an important role here, in encouraging that optimal environment in which industry, consumers, and investors mutually benefit. One key example of how this can occur is the balanced approach to prudential supervision and enforcement that guides our examination process.
While you can rest assured that if violations exist, our exam process will uncover them, enforcement is a process more than a goal: the goal is prevention, through clear standards and a constructive regulatory dialogue.
b. Superior service
I would much rather see our exam process function as an educational opportunity, as a service to help supervised institutions avoid problems.
Department staff members are accessible as a resource in this way, and not only during examinations. Banks should feel free to contact us whenever you are considering a change in business strategy; for example, when adopting a new product line, changing underwriting standards, or entering a new geographic market. The Department prides itself on the superior service that we offer to our banks in developing this kind of cooperative approach.
Ensuring that we are timely in responding to applications is also a priority for me. In my discussions with bankers, a few have shared pending matters with me and I encourage you to do so if there are issues that need resolution.
I see this high level of service as a value, and not just a value in terms of the benefits that accrue from constructive regulatory relationships. It is also, quite frankly, a benefit in the immediate financial sense. Though I began my career with the OCC, I’m not shy to mention that when comparing regulators’ fees, there is a substantial cost difference. While fees alone should never dictate the choice of charter, the state charter is a good business decision.
d. Reduced regulatory burden
And that personal, service-oriented supervision that I described is also accomplished with the use of a reduced examination team. Through the use of cutting-edge tools such as statistical analysis, we are able to shorten the length of the exam and cut the number of examiners needed on-site. This more nimble and flexible approach reduces regulatory burden and results in the Department having a comparatively smaller regulatory footprint within your institutions.
And as the state regulator, we also have a unique understanding of the business dynamics here in New York. I believe that our perspective uniquely complements your focus and guides our goal to be the charter of choice for community banks.
3. Working to Ensure Parity Between Charter TypesFees and services, however, are not the only consideration. In the diverse financial services landscape, another factor in that decision are the competitive challenges that remain between charter types.
There are several tools we have at our disposal to work toward parity:
a. The new wild card authority
A prime example is the new wild card authority, with its enhanced ability for banks to initiate changes that will provide a level playing field. The process for me as Superintendent to initiate changes has also been simplified, and I intend to pursue this option. I would encourage you to consider utilizing this opportunity, at the institution level and by bringing to my attention any particular powers that would be appropriate for action.
b. Multi-state initiatives
I’m also enthusiastic about the steps we’ve taken to reduce regulatory burden for our banks that operate across state lines. We’re working with other states where we share oversight, in particular with contiguous states like New Jersey, to streamline the inter-state examination process. We are even considering home-host state compacts that would virtually eliminate the practical effects of jurisdictional overlap.
Our efforts through CSBS are also relevant here. The Conference of State Bank Supervisors has been very active in developing lending standards that all states are expected to implement: these standards function as a baseline that helps to harmonize the various state laws and reduce compliance expenses. The CSBS standards on nontraditional and subprime mortgage lending, which New York has adopted, also work to ensure a level playing field with national banks and between depository and non-depository lenders.
c. Increased state-federal cooperation
I’ve also been vocal in advocating for a national minimum standard for mortgage lending. The progressive consumer protections laws here in New York may serve as models for these national standards, which would extend these important benefits and reduce differences, real or perceived, between state and federal regulators in the consumer protection area.
And I can also assure you that the Comptroller is serious about invigorating the OCC’s consumer protection effort. Back in May, I invited Comptroller Dugan to a roundtable discussion with senior Department staff. We were able to have a candid but constructive discussion on the future of state-federal regulatory relations.
And it was clear that the OCC is interested in working with the states and cooperating in coordinated exam activities, such as reviews that consider both the national bank and the state-licensed mortgage bankers and brokers that the bank utilizes.
So while there may be increased charter competition in the more stratified post-Watters world of preemption, there is no “race to the bottom” in setting regulatory standards. On the contrary, as national standards develop, we may expect an increased convergence that will further provide a level playing field in a diverse and competitive industry.
4. Continuing to Modernize our Regulatory Framework
But if we want to keep winning together in New York, we need to stay ahead of the curve and prepare for the demands and pressures that the industry will face in the future.
With that in mind, Governor Spitzer has created a new Commission to “Modernize the Regulation of Financial Services.” The Commission is charged with identifying ways for New York to enhance its status as a world financial center and bring our regulatory structure into the 21 st Century. Those goals are just as important for community banks as they are for commercial banks- community banks are the backbone of our dual banking system.
We need to ensure that our implementation of the dual banking system and regulation of all financial services- whether related to banking, securities, or insurance-- preserves all of the benefits that it was designed to confer. And good regulation promotes healthy competition, diversified financial institutions, and market innovation- while ensuring that any redundancies or overlap are minimized.
This is a complex task that requires deep analysis, and the Commission brings together a prestigious group: executives of financial institutions, consumer organizations, elected officials, and the heads of state agencies. But I want to emphasize that the panel is no mere think tank- even though the issues are complicated, the goal is to produce tangible results in the form of an action plan.
While the Commission is scheduled to hold its first meeting later this month, there are several areas that are likely to merit review:
- Developing a holistic review of how all financial institutions and products are regulated at the state level and whether the existing structure is effective and optimal;
- Identifying regulatory hurdles in bringing new products to market;
- Eliminating redundancies, gaps and inefficiencies between and among agencies; and
- Assessing whether a more “principles based” or “prescriptive based” approach to regulations – is most effective.
The goal is to identify ways in which regulatory powers can be integrated, rationalized and changed in order to promote economic innovation, while protecting consumers. I am quite excited about the prospects for the Commission and looking forward to serving as a member. I am considering ways in which your voice and input from the Independent Bankers Association can best inform the Commission’s work. I expect that you will be hearing a lot more about it during the next several months. But the Department is already preparing to move forward, and has formed an internal regulatory task force in preparation for the Commission’s first meeting.
And I hope to be hearing more from each of you - about your ideas for modernization, as well as your questions and comments on the Banking Department’s mission. If there are concerns and issues that are affecting you as community bankers, I hope that you will feel free to contact me so that we can start a conversation and identify solutions.
I have talked a lot today about the value of the state charter. Having started my career at the OCC and having worked in a number of national banks, I believe I have a fair perspective on the issue. And that is - that the state charter should be the “charter of choice” for community banks. I know that about half of you have opted for a national bank charter. And while there are many factors to consider in your charter choice - historical, financial, and structural - I would like to hear from you about the factors influencing your decision. If some of the decisions are based on factors at the state level, I’d like to know that.
Just as you as CEO’s are accessible to your business and civic leaders, I want to be accessible to you. You may reach me directly at 212-709-3501 or by e-mail at email@example.com.
Thank you for the invitation to speak with you here today