Economy Matters podcast series

Tom Heintjes: Hi, and welcome back to another episode of the Economy Matters podcast. I'm Tom Heintjes, managing editor of the Atlanta Fed's Economy Matters magazine, and today we're going to talk about the business of banking. I'm sure everyone listening to this podcast has some sort of relationship with a bank—we deposit money, withdraw money, maybe take out a loan or a mortgage. It all works so smoothly that we don't really have to think about the complexity that goes into banking. So I've invited John Pelick and Erien Terry, a couple of my Atlanta Fed colleagues from our Supervision, Regulation, and Credit Division, to talk about banks, banking, and the business of banking. John and Erien, thanks for sitting down with us today.

John Pelick: Thanks for having us.

Erien Terry: Thank you.

Heintjes: John and Erien, I invited you onto the podcast because I wanted to talk to you about banking, as I mentioned, but maybe not the type of banking people are accustomed to hearing about. I wanted to talk, rather, a bit about what goes into establishing a bank, setting up bank branches, and that sort of "inside baseball" stuff—which is very important, but doesn't really get all that much attention. And as I just mentioned, you both work in our Supervision, Regulation, and Credit Division. Can you just briefly tell listeners what SRC does, without getting too far into the weeds?

Terry: Sure, Tom—I'll kick us off. I will say that the work we do in SRC helps to promote a safe, sound, and efficient banking and financial system, and a fair and transparent consumer financial services market that supports the US economy and makes it more stable.

Heintjes: So that's obviously pretty important stuff. How do you go about, in general, achieving those goals?

Pelick: I'll take that one. The way I like to describe it is, essentially, we have bank examiners. For some folks in the general public, they're like, "What's a bank examiner?" And the way I describe it is, kind of like auditors: we send our examiners into banks, they meet with the financial institutions, they supervise the financial institutions, and they look at a lot of different categories, from a risk perspective—so, credit risk, operational risk, cyber risk—and a lot of the financial side of the house, too.

Heintjes: The Atlanta Fed is a bank supervisor. We're one, the Office of the Comptroller of the Currency is another, the Federal Deposit Insurance Corporation is another supervisor. So what kind of financial institutions does the Atlanta Fed specifically supervise?

Terry: We have a diverse portfolio of entities that we supervise. They range in different categories from community banking, regional banking, as well as large banking organizations—and we even have an international banking portfolio, known as foreign banking organizations. And in addition to that, I will say that our entities that we supervise span across the southeastern portion of the United States. And also, I will add that they're all members of the Federal Reserve System. And we have oversight of the bank holding companies as well.

Heintjes: Very good. And the flip side of that question is, what kind of bank does the Atlanta Fed not supervise?

Terry: We do not supervise entities such as finance companies, as well as credit unions. And banks that are not members of the Federal Reserve System, we do not supervise them.

Heintjes: Right. Let's discuss what goes into evaluating a bank's ownership—officers, directors, and roles like that. What goes into that sort of evaluation?

Terry: Tom, that's a great question. I would just start off by saying that a key critical piece of that process is the Interagency Biographical and Financial Reports, also known as the IBFRs.

Heintjes: Okay, let's tap the brakes on that one. What's that report again?

Terry: That's the IBFR, the Interagency Biographical and Financial Report. Those reports are actually forms that are submitted to us, and those are actually used to evaluate the various competencies of the different shareholders and CEOs of various institutions. We actually use that form to look at biographical, financial, and employment data for specific individuals. Those forms may also elicit a fingerprinting process or a name check process, and that gives us background information on those types of individuals that allows us to look at the financial competency of the individuals, as well as their employment background, their integrity, their experience. All of that is used to evaluate how well they're able to lead—from a "safe and sound" standpoint—an institution.

Heintjes: I just mentioned that there are other bank regulators. Everybody's heard of the FDIC, and maybe not so much the Office of the Comptroller of the Currency—but they are also bank regulators. Why would a bank want to become a state member bank and be supervised by the Fed?

Pelick: We could probably sit here and talk about that for a long—

Heintjes: Maybe that's another episode for later down the road.

Pelick: I think episodes two and three, maybe as a follow-up. But I think at a very high level, I think first starting with some of the values we have here at the Atlanta Fed. We really do try to model integrity, excellence, and respect, and we try to carry that format into our supervisory work. Along those same lines, we think that a lot of the benefit that we bring as a supervisor really comes into the collaboration we have—with other Reserve Banks, but also transparency and collaboration with our financial institutions. I think to dig a little bit deeper, but not to go into maybe episode two or three—we also think about things from a value proposition of, there is efficiency in being a Fed state member—there's some cost-benefit. There are elements of the supervisory work that we have around tailoring our supervisory programs to the state member banks. And then also we think, again, we have formed really good relationships with our member banks and bring a lot of expertise. I mentioned it before, but we have examiners who cover a wide variety of different specialty skills, and that really helps us to home in and bring some solid foundational supervisory work as we examine the member banks and our state member banks.

Heintjes: To follow up on that, what's involved in becoming a state member bank? What steps, specifically, would a bank have to take?

Pelick: Again, this may be episode three, too, because we really have a lot of different things. But at the highest level, we do ask that there are certain documents and materials that are submitted to us to really allow us to review the financial information, the history, the management team, the management structure, future prospects, businesses and business structure within an organization, capital and capital structure. So there are elements of information that are submitted to us that we look at and evaluate as different organizations are looking at becoming a member bank. I think we may get into it a little bit later, but there's an application process and there are some forms that we have, and all kinds of different elements of the application process that we can not only point you to, I think we're going to put some links out on the podcast. But we have links on our website as well.

Heintjes: Right. And what is the cost to file an application to become a member bank?

Pelick: For institutions that are less than $100 billion in consolidated assets, there's no membership application fee.

Heintjes: Let's say a bank wants to learn more and consider becoming a state member bank. Without getting into episodes four, five and six, what's involved in that?

Pelick: I think the first step that we always really try to encourage—and I mentioned about collaboration and transparency—is actually having a conversation with us. We like to set up a premembership, prefiling conversation with our leadership team, our executive officers here, and then also the prospective organization management and potential members. During that discussion, we really try to lay out some of the preset information, like I mentioned before—the steps and processes that you have to follow for filing an application. But then we also try to highlight, what are some of those things that the organization needs to think about as they're approaching the application process? So really trying to lay out some of those specific things that could be those at-risk items that would put an application in limbo for a while. We really try to work all that out in a conversation in advance, at a prefiling meeting, as we call it.

Heintjes: So that's for a newly organized bank. What about for an existing bank?

Pelick: Actually, let me step into the two pieces, process-wise—again, at a very high level for a newly organized bank, but then also an existing bank. So, at a high level for a newly organized bank, what we actually ask is for that organization to apply for deposit insurance with the FDIC. They also would have to apply with the appropriate state banking authority for a state charter. Then once they do that, they can submit that information to us for review, and then once the charter's approved by the state, we ask for evidence of those approvals. So in addition to the prefiling meeting that I talked about where we talk about some of the process stuff, those are a few steps that an organization would follow as a newly formed bank, when they get into our process. For an existing bank that already has a charter, we would ask that institution to work with their current regulator and notify them of a charter change. We would ask them to apply with their state banking authority, like the newly formed organization would have to do. Then we would look for the state banking application. We would then work with the current regulator and talk about a lot of the transition that would happen if they changed charters from that regulatory authority to be a state member bank with us.

Heintjes: Speaking of existing banks, I want to talk just briefly about banks with branches—which, of course, most of us are familiar with. When an established bank wants to open a new branch, how complex is that? What's involved there?

Terry: Well, Tom, to kick off that process, an application must be submitted to the Reserve Bank in the form of a letter that includes a detailed description of the proposed branch. Also, a copy of the affidavit of the publication that goes into the newspapers should also be included with the letter. There is additional information that's located on our website that individuals can also go out and seek more information.

Heintjes: Speaking of branching, I'd like to ask you about trends in branching, if you can discuss that. Has the number of branches in the Southeast changed much in recent years, with the rise of electronic banking and so forth?

Terry: You know, Tom, even with the rise of electronic banking, we are still seeing a steady flow of branching applications in the Sixth District. Brick and mortar branches are still being constructed, and people want those.

Pelick: I was going to actually add on to that a little bit. I think the way that we're seeing institutions move towards a digital platform has actually changed around the approach they take to brick and mortar. It may not be the standalone brick and mortar, it may be something that's in a retail shop—so a smaller branch, but still a lot of the same capabilities. Because there really is that need for customer interaction, There's still a need for face-to-face interaction that the bankers are telling us they think the customers still want to exist, although there's still a lot more capabilities that are coming with mobile banking and so forth that don't make you go into the branch like you used to.

Heintjes: I used to see a branch inside my grocery store. I didn't bank there, but I thought it was really convenient for those people who did. But let's say that over time, populations shift and a bank wants to move a branch as a result. How easy is it for a bank to move one of its branches?

Terry: Tom, that's a great question. I'm just going to tell you, I'm getting ready to go into tutorial mode now. There are several factors that play into that.

Heintjes: You've warned me.

Terry: Exactly. So it depends on several factors, such as: if the branch needs to be moved, if it's in a principal city within an MSA [metropolitan statistical area], you can move it 1,000 feet. You can move it one mile if it's within an MSA without a principal city. And thirdly, if it's not in an MSA at all, you can move it two miles. Those are just three major scenarios. If the scenario does not fit into one of those three categories, then a branch application must be filed and submitted to the Reserve Bank, as well as an additional form, the Branch Closure Notice.

Heintjes: I'm not surprised that sort of thing is very tightly defined. How about the bank's main office? Are the requirements to move that sort of location different?

Terry: Yes, they are. A bank's main office, you do not have to file an application in order to move that. A main office of a branch is really not considered a "branch"—even though it does have branching activities that take place, it's not considered a branch. Main offices are exempt.

Heintjes: Right. And how about closing a branch? I've had this happen to me a few times.

Terry: Exactly—I have as well. With respect to the process to close a branch, it begins with a written notice that must be provided to the Reserve Bank and branch customers at least 90 days before closing. There are also notices that must also be posted at the actual branch for customers to view at least 30 days prior to the closing of that branch. And I will also add that, what's very important is that the bank have a written branch opening and closing policy.

Heintjes: I know the CRA, or the Community Reinvestment Act, touches on branch banking and the availability of banking services to communities. Does it touch on the opening or closing of branches?

Pelick: Yes—as Erien stated, a bank must have a written branch opening and closing policy, and this is a requirement within CRA.

Heintjes: In preparing for our conversation today, I noticed that you'll be hosting a virtual event devoted to bank holding companies. Can you briefly explain what a bank holding company is? You referred to them before. Is it something we use in our normal daily financial lives but don't have much awareness of?

Pelick: A bank holding company is a corporation that owns a controlling interest in one or more banks but really doesn't offer banking services itself. It can also have other subsidiary company operations within, but customers really wouldn't interact with—or have one-on-one business interactions with—the holding company.

I'm glad you mentioned, Tom, the plug for our upcoming event, and I "high leveled" a few things about becoming a state member bank earlier. But we do have the Sixth District Community Bank Holding Company and Applications Supervisory Perspectives conference that's coming up. It's a virtual event—it's Tuesday, October 4, from 9 a.m. to noon. If anyone wants to get more information and plug in and hear more about not only what a holding company is, but some of the information related to applications, we'd encourage you to sign up and attend.

Heintjes: Great, we'll mark our calendars, and we'll be sure to have a link to that information on the podcast web page. What are some topics that affect bank holding companies today—and have those topics changed much in recent years?

Terry: Tom, we have begun to see financial service companies interested in becoming bank holding companies by purchasing banks, and this would be considered a complex, nontraditional type of application compared to what we would see historically.

Heintjes: Let me ask you about current trends in mergers and acquisitions. I've been with banks over the years that have been swallowed up by banks that were swallowed up by larger banks, and so on and so forth. What are the current trends in M&As today, and what effect is it having on the banking industry overall?

Terry: Great question, Tom. I would say, in addition to what I previously mentioned, we are observing a steady merger and acquisition activity stream, along with increased interest in Fed memberships—banks desiring to seek Federal Reserve state member charters—and we're also seeing more complex cases, including nonbank subsidiaries of holding companies.

Heintjes: In general, what are some topics that bankers are most focused on these days? I always hear a lot, of course, about cyber risk and cyber security. As supervisors, how do you help bankers deal with these concerns? What keeps them up at night, and how do you help them get to sleep?

Pelick: Tom, you mentioned it—cyber is something I think that's in most every conversation. And like I mentioned before, we have a lot of expertise that currently exists, but we're building out in the exam world around cyber and cyber risk. I think that's one topic, obviously, that's on everyone's mind, personally and in the banking world. Cryptocurrency—digital assets—is a big one, too, and we've had some focused efforts around the Reserve Bank—and other agencies—really trying to understand, to dig into: what are some of the banking activities, and banks' involvement, in crypto and digital assets? In addition to that, on the innovation technology front, the financial technologies, or "fintech," companies—the Reserve Bank has had several systemwide, and local, interactions with fintech companies and banks who are really partnering and trying to understand and offer different financial services through different channels. The cyber, crypto, fintech topics are hot topics right now. We're not only building out a lot of capabilities from our examination work there but also interacting really closely with the industry to see what's going on. And I think one last thing I'd plug is, everyone is focused on what's on the horizon for the economy: how do things post-Covid impact banking conditions, financial conditions? Obviously, we're not going to get into a discussion of interest rates here and monetary policy. But obviously, there is a big impact on how banking and financial services really flow with the economy and the state of the economy.

Heintjes: I meant to ask you this earlier, so I'm going to circle back to bank applications, which we discussed before. I've heard talk of a new tool for banks to use around applications. Can you briefly discuss that tool?

Terry: I'm excited to announce that as of October 17, we will begin using FEDEZFile, which is a cloud-based tool through which mergers and acquisition filers can submit applications and related correspondence, and Federal Reserve staff can actually deliver official and related messages—all electronically, one-stop shopping. This will hopefully improve efficiency and processing. This will also allow for complete end-to-end processing using a single online platform, and it will make the filer's ease of use much greater—and it will also, again, provide more efficiency to the filing of information. So, this will definitely have an impact on the applications' processing. I will say—and this is just another shameless plug—that more information will be disseminated about FEDEZFile at the October 4 outreach event. Again, that's the one that is going to be the Sixth District Community Bank Holding Company and Applications Supervisory Perspectives event. More information in detail will be provided at that time about the FEDEZFile.

Heintjes: Shameless plugs is part of why we're here. I should know this, but do we have information about FEDEZFile on the website?

Terry: It is forthcoming.

Heintjes: Okay, so we'll link to it when it's available.

Terry: Yes.

Heintjes: Very good. Well, guys, I want to thank you both so much for taking us behind the scenes like this. It's definitely a side of banking we don't hear about much, and I really appreciate your shedding light on all this and providing all this great information.

Pelick: We appreciate you having us.

Terry: Yes—thank you.

Pelick: It's been great.

Heintjes: I also want to give folks the opportunity to learn more about anything we've discussed today, so how would people reach you if they wanted to?

Terry: They can reach me at my email address, and that is erien.o.terry@atl.frb.org. The first name, "Erien," is spelled E-R-I-E-N. Last name is Terry, T-E-R-R-Y.

Pelick: And to reach me—I'm John Pelick: it's john.pelick@atl.frb.org.

Heintjes: Very good. John and Erien are both very nice fellows, and I promise you they'll be happy to answer your questions. And that brings us to the end of another episode of the Economy Matters podcast. Again, I'm Tom Heintjes, managing editor of Economy Matters magazine, and I really appreciate your spending time with us today. I hope you'll join us again next month for a new episode.