Alston & Bird

The headlines in banking of late have too often involved alleged and admitted misdeeds by banks and bankers. Regulators have expressed concern that despite the array of new rules, guidance, and enforcement actions brought in the wake of the financial crisis and the Dodd–Frank Act, banks just seem to keep turning up problems. From the industry’s perspective, this feeds the narrative, warranted or not, that consumers need protecting from financial services providers. Some even go so far as to question whether banks have a “culture” problem that needs “fixing.” Even with Republicans in control of the White House and both houses of Congress for at least 2017 and 2018, radical notions such as abolishing the CFPB or the total repeal of Dodd–Frank seem remote. Moreover, abandoning consumer protection and compliance as a regulatory priority is not likely to happen any time soon. Thus, the hot topics in bank supervision are expected to continue to revolve around compliance issues.

Of all the banks that failed during the Great Recession, not one of them failed because of compliance-related problems. Nonetheless, bank supervisors are likely to continue to emphasize compliance areas such as the Community Reinvestment Act, fair lending, the Bank Secrecy Act, and other compliance matters as their priorities in supervision. Failing to do well in those areas can severely limit a bank’s ability to grow through acquisitions and de novo branching. Any growth strategy that requires periodic regulatory applications/approvals can only be executed with best-in-class compliance systems.

Banks have continued to reach for less traditional loan products, such as asset-based lending, factoring, lease finance, reverse mortgages, premium finance, indirect auto lending, and warehouse facilities. Banks have also sought to leverage FinTech partnerships and emerging technology tools, resulting in new underwriting and loan sourcing methodologies. As always, these products must be considered in light of concomitant compliance risks and capital requirements, and bank supervisors expect banks to be able to demonstrate their understanding of how these businesses will perform throughout a business cycle.

“Abandoning consumer protection and compliance as a regulatory priority is not likely to happen any time soon.”

Despite the impetus for compliance and risk management discipline, wise bankers will not lose focus on the primary drivers of bank risk and profitability—that is, asset quality, earnings, and capital. At the end of the day, banks with poor asset quality and/or anemic earnings performance will not be allowed to execute an expansionary business plan, no matter how successful their compliance and risk management. Capital will continue to be of the utmost importance, particularly for banks with concentrations in commercial real estate loans. High-performance banks that expect to execute growth-focused business plans must have across-the-board success in both compliance and safety and soundness disciplines, and they need to have the capital to support the execution of any business plan.