As published in Compliance Week Magazine
ComplianceMarch 27, 2023
Leadership, resource support key to compliance navigating bank turmoil
The compliance departments at First Citizens Bank & Trust and New York Community Bancorp have a monumental task ahead of them following their banks’ respective purchases of Silicon Valley Bank (SVB) and Signature Bank from receivership.
First Citizens on Monday announced its acquisition of $110 billion in assets from Silicon Valley Bridge Bank, while New York Community Bancorp subsidiary Flagstar Bank on March 20 announced its acquisition of approximately $38 billion in assets from Signature Bridge Bank. SVB and Signature Bank were each placed under the receivership of the Federal Deposit Insurance Corporation (FDIC) earlier this month followings runs on deposits.
“It certainly becomes a great test for any bank going through significant changes like that,” said Jeffrey Fox, a senior regulatory consultant with Wolters Kluwer US Advisory Services, regarding the acquisitions.
In sudden bank buyouts, the workload on compliance departments at both the acquiring bank and acquired institution skyrockets as new customers, sometimes tens and thousands of them, are nearly instantly assumed by the purchasing bank.
The acquiring institution and its compliance department is responsible for familiarizing themselves with the processes and procedures of the institution being acquired, Fox said.
The acquiring bank’s compliance department “may need to make adjustments,” Fox said. Overall, the compliance departments of the institutions involved “need to work hand in hand” in the early days of the transition to ensure risk is appropriately being managed, he said.
Who takes the lead on prioritizing aspects of risk minimization should be decided by the legal departments.
“You’ll have redundancy with two compliance departments in the beginning,” Fox said. “Wholesale changes are further down the road.”
This work is a time for compliance teams and leadership to “be on their A game,” said Patrick Hanchey, partner in the financial services and products group at law firm Alston & Bird.
“There’s not much time for diligence,” but teams must make the time to follow through, Hanchey said. Fox’s advice was similar: Stay calm and leverage your existing processes and protocols.
“Day-to-day compliance absolutely needs to continue during situations like this,” Fox said. “I would advise really adhering to that program.”
Leadership needed
The compliance department must know senior management is fully backing its efforts to monitor risk and support the vetting of new customers and their withdrawal requests, Hanchey said. Leadership, whether the chief executive officer, chief risk officer, or board, can message compliance and bank staff and urge them to step up and not skimp on vetting client requests, he said.
Most banks have an incident response program set up to kick in when facing fraud, service provider outages, or runs on deposits. The program is designed to bring leadership and key stakeholders together to determine the impact of an incident across the organization from a compliance, liquidity, and fraud perspective.
The group determines what next steps should happen; it’s critical seniors bank leaders share decisions and information coming out of such meetings with front-line employees, Fox said.
“There is nothing worse than employees, especially those interacting with customers, not being prepared for the crisis unfolding,” he said.
Opportunity to staff up
The time for bank compliance departments to plead with their C-suite for more resources is now, said Hanchey.
“It’s absolutely an opportunity to hire,” Hanchey said of the ongoing bank turmoil. Compliance can tell leadership, “‘There’s going to be more attention on what we do, and you need to give us the resources we need to do our jobs,’” he said.
There is nothing worse than employees, especially those interacting with customers, not being prepared for the crisis unfolding.
Whether a bank is getting new deposits or making acquisitions, “Compliance has elevated duties for probably years to come,” Hanchey said.
Then there’s the No. 1 question on the mind of bank executives following the failures of SVB and Signature Bank: “Can this happen to us?” For banks with sound risk management programs in place, diversified clients, and low exposure across sectors, the answer is likely no, said Fox, but it’s critical to review controls and stress test where necessary.
Is there anything that needs to change at the bank based on recent customer trends? Are you managing risks appropriately? Are your resources qualified? Do you have a culture in which management will listen to concerns about risk? Answering these questions can help ensure any potential gaps are filled while weathering the chance for heightened volatility.
Prepare for greater oversight
Banks should expect more scrutiny from regulators pressured to identify struggling institutions and intervene.
“Regulatory oversight is a pendulum, and we can expect it to swing in favor of tougher scrutiny by regulators for the next few years,” Hanchey said.
Previously, regulators have largely focused on risks related to lending, Hanchey said.
“The new focus will be on depositor concentration and groupings,” he said. A large reliance on one type of deposit “is a true indicator for a bank run,” he said.
Regulators and lawmakers are also discussing the possibility of raising the limit on insured deposits from $250,000.
Rep. Patrick McHenry (R-N.C.), chair of the House Financial Services Committee, told CBS News earlier this month one of his priorities would be to determine if the FDIC insurance cap needs to be increased, like it was from $100,000 following the 2008 financial crisis.
If the limit is raised, Hanchey said he doesn’t believe there would be a measurable increase in risk at banks. “I don’t see it as a risk to compliance,” he said.
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