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5 terms regulators love to use

What do they really mean?

5 terms regulators love to use

I recently facilitated an outside director peer group discussion at ABA’s National Conference for Community Bankers. In light of the wealth of new and old buzzwords floating around the industry, I am taking a brief break from my current series on getting and keeping the right people, and I have devoted this blog to the ever-evolving “regulatory speak.” 

It seems the regulators are continuously coming up with new terms, new spins on old terms, and the like. My purpose is to discuss five terms today’s regulators love to use, what they really mean, and why the regulators just do not say what they want.

The five terms addressed are “safety and soundness”; “robust”; “unfair, deceptive, and abusive”; “excessive”; and the newest term, “credible challenge.” 

“Safety and Soundness”

Safety and soundness is as old a term as they come (it has been there since I have been in the business).

However, as with the other terms, it has had a continuously evolving meaning. Historically, it primarily focused on credit quality—if your community bank did not have good credit quality, it was not safe and sound.

Today the term has evolved into a guideline for everything from executive compensation to board oversight, and a bunch of other issues.

The courts have historically upheld the regulators’ determination that an activity or a condition is unsafe or unsound. Why? Because regulators are the safety and soundness “experts.” 

Yet “safety and soundness” is one of the great “catch-all” terms of all time. When the regulators mean they want something to change, they tell the bank that the activity or condition is unsafe or unsound. If the regulator cannot point to any concrete inadequacies, they tell you the activity or condition is not consistent with safety and soundness principles.

The term is often used with regard to the loan loss reserve.

“Your loan loss reserve is not calculated accurately. It is not consistent with the guidelines for safety and soundness.” Bankers then question, “How would you like us to calculate it?”  The regulators answer—“We can’t tell you.”  That is safety and soundness.

“Robust”

Robust is a relatively recent term, and it is an adjective that revs up whatever follows.

It means, whenever it precedes a term, that the regulators want you to do more than you would consider normal. As in …

• You need to have a robust compliance program.

• You need a robust risk management system.

• You need to develop a robust loan review process.

Robust grew out of the Great Recession, when apparently community banks were operating with whatever the opposite of robust is.

Robust is simply one of those terms where what the regulators really mean is “Do it more than you are doing now, and do it to the edge of reasonableness.” 

If you are a $100 million bank and you have just started your risk management program, then you need to move it from where it is in its infancy, to where it should be as a robust program for your size of bank. As is typical, it is tough being criticized for not being “robust” when you have no clue what “robust” means on the continuum of anti-robust to robust.

“Unfair, Deceptive, and Abusive”

Unfair, deceptive, and abusive is a little easier to figure out. Oh, there are legal definitions for sure, which I will not bore you with here.

But the reality is if your community bank is being criticized for an unfair, deceptive, or abusive practice, what it really means is the regulators do not like the product your community bank is offering.

Ask the payday lenders, the deposit advance lenders (all of whom have left the business in the last month or so), or the balance transfer card banks.

If the regulators cannot find a substantive flaw in the product itself, they will attack it by asserting that the disclosures are unfair and deceptive. Apparently, the theory is that if disclosures were not deceptive, the customer would really understand the product, and, as a result, the customer would not use the product. Unfair and deceptive means “we do not want you offering that product anymore, community bank,” or even “regional bank.”  That, and the implied, “If you do, we will make your life miserable.” 

Of course, the regulators will never tell you they do not want you offering the product, because they are not going to “run your bank for you.” 

The reality is, however, if it is a product they do not like, they will attack it from an unfair and deceptive or abusive standpoint and make it so difficult for your bank to offer the product that it is simply not feasible, neither economically nor reputationally.

“Excessive”

Excessive is one of those great words where the definition is in the eye of the beholder.

What may be excessive to one examiner in one community bank may not even draw the notice of another examiner in another community bank.

Excessive is often used with other words attached, such as “compensation” or “risk taking” or “loan exceptions.” 

It is a great adjective to describe something that the examiners do not really like. It fits along the lines of “robust,” just in a different context.

I suppose the goal of all of us would be to not do anything “excessive.” That implies that it is outside the norm from a regulatory standpoint.

I have seen the regulators over the years claim bank CEO compensation as being “excessive.”  My initial reaction is always, “Well, of course it is excessive to the examiner—the CEO is making three times what the examiner is making!”

P.S.  If you are doing anything to excess, you probably ought to stop.

“Credible Challenge”

Last, but not least, is a newly coined term from the regulators: “credible challenge.”

I actually kind of like this one.

It recently appeared in the guidance for governance for large banks. The issue of being a credible challenge to management will filter down to the community bank boards of directors.

I robustly and excessively guarantee it.

Credible challenge really refers to the board and its relationship with management. That is, is the board a leader or a follower? 

Is your board meeting really a management meeting which the board attends?

Or is it a board meeting to which management is invited? 

The board’s job, according to the regulators, is to provide a credible challenge to the recommendations of management.

That meaning when the board is in this position, its challenge will be effective, definite, supported, and based on some reasonable expectation that it will be acted upon by the management team.

Be familiar with the buzz words set forth above so that you too can operate in a safe, sound, robust environment, with the board being a credible challenge to the management team in order to avoid unfair, deceptive, abusive, or excessive practices.

Jeff Gerrish

Jeff Gerrish is chairman of the board of Gerrish McCreary Smith Consultants, LLC, and a member of the Memphis-based law firm of Gerrish McCreary Smith, PC, Attorneys. He frequently contributes to ABA Banking Journal and ABA Bank Directors Briefing, and frequently speaks at ABA events and telephone briefings.
Gerrish formerly served as regional counsel for the FDIC’s Memphis regional office and with the FDIC in Washington, D.C., where he had nationwide responsibility for litigation against directors of failed banks. Since the firm’s formation in 1988, Gerrish McCreary Smith has assisted over 1,500 community banks in all 50 states across the nation with matters such as strategic planning, mergers and acquisitions, common stock private placements, holding company formation and reorganization, and a wide variety of regulatory matters. Jeff Gerrish can be contacted at jgerrish@gerrish.com.

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