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Superintendent Neiman Addresses the Institute of International Bankers on U.S. Regulatory and Compliance Requirements

July 16, 2008

Good morning- and thank you, Larry, for that warm welcome.  I’d also like to thank the IIB and CSBS for the opportunity to speak with you today.  I’m pleased and honored to be chosen as the kickoff speaker.  I take that as a reflection on the important role of the dual banking system and the New York State Banking Department in international supervision.

I had the pleasure of participating in last year’s orientation program as well, during my first few months as Superintendent.  These international relationships are a highlight of my responsibilities as Superintendent.  Now here we are together again- ready to welcome you as the next group of international bank officers to have recently arrived in the US.

When I spoke at this program last July, the credit crunch was just about to hit full force.  A year later, we’ve experienced combined write-downs of over $400 billion, the collapse of Bear Stearns and the failure of IndyMac, among the largest investment banks and thrifts in the country.  Even mortgage giants Fannie Mae and Freddie Mac are not immune to the sting of the credit crisis.  And the market turmoil continues.

So it’s natural if you may feel some trepidation as you embark upon your new assignments.  In fact, this orientation program reminds me somewhat of an orientation for college- in the same way, you’re here to have a whirlwind preview of the challenging new assignments that lie ahead.

I certainly hope you have a smoother time acclimating to your new posts than I did as a student starting college.  I remember back then that I was overwhelmed by the newness of it all, college practically felt like a foreign country- although in your case, this really is a foreign country!

For me as a student, there was new slang language to learn, including the Greek letters for fraternities- and now you have to deal with a whole list of acronyms that we call “alphabet soup.”  There’s the OCC, OTS, FDIC, and FRB as regulators….and products with cryptic names like CDO and CDO².  College also meant a large campus to get lost in- and you’re faced with New York City, one of the largest in the world.  But worst of all- the older students made me wear a freshman’s beanie cap!  That’s a crazy little hat they used to issue to new students.  Hopefully, the bank doesn’t force you to adopt any unusual attire!

Of course, I was familiar with some of the concepts before I started college.  But there were also unique traditions and customs to absorb, experiences that are rarely learned from books.

So this morning, as you launch this new phase of your careers, I thought I would focus my talk into three areas:

These are certainly historic times to be in banking- what a journey to be part of!

The dual banking system

I’d like to begin that journey with an overview of some unique features of the US financial regulatory system.  One of the first steps for new banks officers in the US is to learn to navigate your way through the diverse agencies that collectively regulate the finance industry.   If you are coming from a system that is more centralized, the US approach can seem complex- even a patchwork.  And yet our dual banking system, with layers of regulation, has a subtle genius that has served our economy well.

Let me share with you just a few of the benefits of this dual federal-state supervisory model.

First, having the choice between a state charter or a national charter from the OCC leads to greater diversity in the marketplace.  This diversity strengthens the economy, spurs innovation in products and services, helps sustain the viability of community banks, and contributes to New York’s leadership as a center for international finance.

Having started my career with OCC and having worked exclusively for national banks, my experience as Superintendent has given me a renewed appreciation for the state system.

I am impressed by the Department’s experience with international markets and insight into your operational needs.  I also believe that we are particularly accessible as state regulators.  The presence of so many of our staff at this orientation conference is just one example of our commitment to dialogue and our prudential approach to supervision.

Just two days ago I had the honor of signing a new license for a branch of China Merchants Bank, the sixth largest bank in China.  This is the first branch of a bank from mainland China to open in the US in seventeen years.  I like to think our value as a regulator contributes to the decision of so many other foreign banks to come to the New York State Banking Department when they are ready to locate in the US.

Fundamental building blocks of a sound compliance program

Over the next two days, you’ll be hearing much more on the current regulatory structure from some of the country’s top finance professionals.  There is more to come on the dual banking system, as well as other “nuts and bolts” or fundamental building blocks of a sound compliance program, including:

Overall, I can’t overemphasize the critical importance of an experienced and integrated compliance department that is coordinated with the home office.

And you are fortunate to be hearing from Bill Rutledge this afternoon.  Bill is head of supervision at the Federal Reserve Bank of New York; he is down-to-earth and one of the most forward-thinking regulators I’ve ever met.

We also have senior staff from the Banking Department who will be speaking later-

I’m confident that they will give you excellent advice and share practical guidance and best practices recommendations.

The current regulatory environment and responses

Now let me turn to the current environment. It’s challenging enough to learn all of these compliance topics at any time, and much more so given the environment in which you find yourselves.  This is an historic time of market disruption and monumental change in the industry.

The current credit crisis also puts the need for financial services reform in sharp focus.  But even though this may be a skittish time for the markets, the opportunity to be part of this reform process is nothing to shy away from.

Think of it- sitting here this morning, you have the chance to be part of what may be the largest retooling of the financial system in recent history.  Many of the federal agencies were formed in response to the Great Depression, and there are reform proposals under consideration that would be equally far-reaching.

There are a lot of ideas on the table, so I’ll highlight just a few to get your thoughts flowing as we kickoff this conference.

Structural reform of regulation

It’s only fair if I put regulators under the microscope first, and begin with major proposals for structural reform.

Treasury Blueprint

The Treasury Department has issued a sweeping proposal or “Blueprint” to realign regulatory structures.  Although some provisions in the Blueprint are controversial, I do agree it’s appropriate at this juncture to take a wide view of the problem.  There is a sense in which regulatory structure in this country has not yet caught up with the realities of greater convergence in financial services after the elimination of Glass-Steagall through Gramm-Leach-Bliley.  Debates from the GLB era are resurfacing.  The credit crisis revisits issues of consolidated supervision and the proper roles for state and federal government.

Some points are clear- there is logic in extending the Federal Reserve’s authority over investment banks, since they now have access to the discount window.  In the long-term, the Blueprint would also create three new consolidated federal charters and eliminate the state charter:

There is no reference to the state charter or the dual banking system.  While I appreciate the comprehensive scope of the Treasury plan, if it were implemented, it would needlessly destroy the advantages of state supervision.  And foreign banking organizations have overwhelmingly acknowledged those benefits by choosing the state license, an option the Treasury would undercut.

I firmly believe that comprehensive solutions can be achieved without damaging the integrity of the dual banking system and state oversight.  We can move forward while still preserving what is best in our present framework.  And such state reform efforts are already underway.

Governor’s Commission on financial modernization

For example, Governor Paterson has in place a state Commission to Modernize the Regulation of Financial Services.

This Commission includes chief executives from industry and is chaired by Superintendent Eric Dinallo of the Insurance Department.  We are looking across the board at banking, insurance and securities.  We want to eliminate redundancies and ensure that similar products receive consistent regulatory treatment, regardless of the type of institution offering those products.  The Commission is also considering the merits of a more principles-based approach to regulation.

I appreciate the input that the IIB, Deutsche Bank, and other foreign banking organizations have given to the Commission already.

Reform of industry internal controls and operations

And while we are busy in government, streamlining our approach to supervision, there are steps for industry to consider as well.  The credit crisis and the changing regulatory landscape provide a backdrop for revisiting broader risk management issues.

Risk management

Preventing a credit crisis like this from ever happening again requires more than a precision fix on the retail side- there are also broader risk management issues.  These particularly impact foreign banking organizations and other institutions who are at least one step removed from the origination of the underlying loans.

In many respects, the current market turmoil reflects a fundamental mismanagement by many financial institutions of their positions relative to the tides of economic cycles.

There is a strong tendency for operations to become too closely wedded to current trends. Resisting this pro-cyclical undertow is a key goal for all risk managers, and especially for large players in the capital markets.  Marketplace innovations like re-securitization clearly got ahead of internal controls and risk management principles for many institutions.

Credit default swaps

Another area for reform is the treatment of over-the-counter products such as credit default swaps. The backlog of unrecorded CDS trades and overlapping layers of counterparty risk could be the other shoe waiting to drop.  As has been reported in the media, proposals are under consideration to create a clearinghouse to provide additional transparency and security for this growing sector of the market.

Need for capital

Another critical issue is the growing need for capital and the role played by private equity and hedge funds.  I anticipate the need for capital will give rise to innovative approaches by these funds, to structure their investments in financial institutions.  It should be no surprise that investment bankers and lawyers are already looking at ways to accomplish this within the framework of the Bank Holding Company Act.

Rating agencies

The way rating agencies are used is also a point for re-assessment.  In a world of such complex products and analytical methods, it can be comforting to rely on the evaluation of a third-party.  But in hindsight, it just didn’t stand to reason that complex products with layers of higher-risk debt could ever receive the same triple AAA ratings as the most traditional corporate bonds.

There is room for more transparency in the information used in the rating decision, as well as consideration of the misaligned incentive when rating agencies are compensated by issuers.

Regulatory reports and conferences

I’ve really just scratched the surface, in highlighting issues for risk managers, international bankers, and regulators.  And every day new insights and avenues for improvement are identified.

I encourage you to read the many outstanding reports which explore these lessons learned in detail.  The Senior Supervisors Group and the Financial Stability Forum reports released this spring are a good starting point.  And the Basel Committee has just published their seventeen proposed guidelines for managing liquidity risk, as well as new several studies on ratings, private equity and leveraged finance markets.

I expect that these will be top on the mind this September in Brussels, at the next meeting of the International Conference of Banking Supervisors which I plan to attend.  The ICBS was designed by the Basel Committee to promote international cooperation between banking supervisors.  I hope you will also take the Committee’s observations to heart, and find creative ways to apply them to your own business context.


So in concluding, I don’t want to leave you with the impression that we need to reinvent the entire banking system.  But the credit crisis does provide an opportunity for a frank assessment of our strengths and weaknesses- as industry and as regulators.  And it also presents an opportunity for international regulators to respond to the reality of a globalized credit market, so we can fully realize that potential.  With all of the energy that you are bringing to your new roles as bank officers in the US, I am confident that you can make a valuable contribution to this new reality.

Thank you and I would be happy to answer any questions.


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