2003 In Review

The year 2003 brought new regulations and increased supervision, along with continued expansion into new markets and products.

Regulations/Legislation

Regulations to implement the USA Patriot Act and the Sarbanes-Oxley Act continued to trickle out in 2003. One of the more significant developments was the issuance of final Customer Identification Program (CIP) regulations under section 326 of the USA Patriot Act, which became effective on October 1, 2003.

The CIP regulations require banks to collect, document, verify and retain certain customer information and to provide customers notice that information is being gathered to verify their identities. While the new rules may seem relatively innocuous because they do not include as many hard and fast rules as many feared, banks should not be lulled into a false sense of security. Risk-based rules can, in some instances, create more compliance risk. It is often difficult to know what the standard is, and the standard evolves over time and often becomes what everyone else is doing.

Another significant regulatory development is Sarbanes-Oxley and its implementing regulations. While this legislation does not directly apply to most community banks, community banks are affected by it. The bar has been raised; regulators and the marketplace have different expectations on corporate governance. If examinations uncover policy violations, violations of law, or other findings that arguably can be attributable to a lack of internal controls, the regulators quickly focus on the institution's governance structure. Questions are raised as to the independence of the Board, its committee structure, and whether the audit function is independent and reports directly to the Board. Also, for new bank charters, more focus is now placed on the composition of the Board than was the case a few years ago.

Supervision

Examinations have been tougher this year due to the state of the economy, concerns that interest rates will suddenly spike, and corporate scandals. Further, banking regulators may feel pressured to be aggressive enforcers to maintain their supervisory role in a climate where the FTC and SEC are increasingly attempting to play a greater role in the supervision of banking organizations.

In addition, some recent supervisory action is the result of the agencies' evolving views on subprime credit card activities and a greater focus on risk management, appraisal regulations, and Bank Secrecy Act compliance.

With the increase in exam findings and the emphasis on early intervention, the regulators are asking more banks to enter into proposed cease and desist orders, written agreements, and memorandums of understanding. Regulators are also increasingly proposing civil money penalties for repeat violations and the failure to comply with outstanding enforcement actions.

Expansion

The year 2003 is not all about tough exams and enforcement actions, however. The industry continues to grow, expand and prosper.

Expansion has taken several forms. First, eight new banks have opened so far this year in Minnesota. In addition, community banks have established more than 80 new branches in Minnesota in the past five years. "Brick and mortar" is increasing despite significant growth in Internet banking.

While merger and acquisition activity was relatively slow in 2003, Bank of America's recent announcement to buy FleetBoston Financial Corp. has fueled speculation that acquisitions will heat up in 2004.

2004

It is hard to predict the future. The last two major pieces of banking legislation were not planned, but in reaction to an act of terrorism and a series of corporate scandals. Nevertheless, a few things are a given. Banks will continue to grow and serve our communities in 2004, a new regulation or two will be issued, and the regulators will continue to keep us busy.