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Financial institutions face changing climate, evolving risks

December 4, 2014

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Financial institutions around the country are currently dealing with widespread change. This industry is one of the most regulated, from the Dodd-Frank Act to the myriad of other rules and restrictions placed on organizations. The end result is an environment that requires constant monitoring, so each financial institution can evolve as needed.

Our experts at Clark Schaefer Hackett closely follow the regulatory climate surrounding financial institutions, as well as the many challenges facing these organizations. With this focus, we can provide comprehensive consulting, tax and advisory services for your bank. We also know the responsibilities you have on a daily basis, which can make it difficult to regularly track changes in this industry.

To help relieve some of the burden, we’ve compiled several new developments affecting financial institutions that may be of interest to you:

More attention focused on leveraged loans
According to the Office of the Comptroller of the Currency, leveraged lending among U.S. financial institutions, as well as foreign banking organizations and nonbanks, is an area that requires additional scrutiny moving forward.

This is due to information from the annual Shared National Credits review, which reported that leveraged loans by the banks surveyed totaled $767 billion – good for 22.6 percent of the total 2014 SNC portfolio. Most importantly, however, were the weaknesses of underwriting and risk management associated with these loans. Out of all the leveraged loans analyzed, 33.2 percent were disparaged by the reporting agencies.

According to the OCC, there are several key areas where financial institutions can improve regulatory compliance related to leveraged loans. In addition to risk management and underwriting, these areas include:

  • Borrower repayment capacity
  • Leverage
  • Enterprise valuation

On a broad scale, the OCC recommended that financial institutions review all lending practices, including leveraged lending, for risk management and compliance purposes.

Cyber security must be a priority
Lending is one element of banking that requires increased scrutiny. Another is cyber security, especially given today’s dependence on technology, mobile devices and online banking.

This was the sentiment expressed by Comptroller of the Currency Thomas Curry, who recently spoke to a number of community bankers on the subject, according to Banking Exchange. He noted that smaller financial institutions are especially vulnerable to cyber risks, such as data breaches.

“Financial institutions are often on the hook to compensate customers for fraudulent charges, and replace credit and debit cards and monitor account activity for fraud at significant costs,” Curry told community bankers, the media outlet reported. “That’s not easy for any bank, but it’s a burden that falls especially heavily upon community institutions. At a cost of $5 or more per card and covering the related fraud charges, the costs can run up very quickly.”

In order to address these risks, community banks must be willing to incorporate cyber security into traditional planning methods. For example, financial institutions must outline how they will respond to cyber attacks, both internally and to customers. The proper systems must be in place to cope with these hazards and mitigate the damage. Furthermore, the risks posed by employees must be addressed – poor password protection and questionable online behavior can open the door for data breaches.

Community bankers speak out on Treasury nominee
President Barack Obama recently announced his nominee for the Treasury Under Secretary for Domestic Finance position within the U.S. Treasury. His choice was investment banker Antonio Weiss.

According to The Wall Street Journal, this nominee has raised concerns among community bankers across the country. Camden Fine, president of the Independent Community Bankers of America trade group, followed up the nomination by sending a letter to several senators outlining the worries held by his organization. Such concerns included Weiss’ ties to Wall Street, as well as his specific expertise on international mergers and acquisitions being too narrow for the position.

In addition to Fine, other opponents to Weiss’ nomination include Sen. Elizabeth Warren of Massachusetts and Senate Majority Whip Richard Durbin of Illinois, The WSJ reported. While people remain divided on this issue, the next step will be a vetting process overseen by members of the Senate Finance and Banking Committee.

These are just three issues affecting financial institutions today. At Clark Schaefer Hackett, we will continue to monitor the current industry climate to best advise our clients. Should you be interested in our tax, consulting or advisory services, please contact us to learn more.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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