State Spotlight: State of the Banking Industry in KentuckyInterview with Charles Vice, Commissioner of the Kentucky Department of Financial Institutions
In the first of a series of interviews with state regulatory leaders, Charles Vice, Commissioner of the Kentucky Department of Financial Institutions, discusses:
Vice was appointed commissioner of the Department of Financial Institutions (DFI) effective Aug. 16, 2008. As the commissioner of DFI, Vice has responsibility for the regulatory oversight of all state-chartered financial institutions, which includes examinations, licensing of financial professionals, registration of securities and enforcement.
Vice was a bank examiner for the Federal Deposit Insurance Corporation (FDIC) for 18 years, serving the Lexington field office. During his tenure with FDIC, Vice served as the office's expert on subprime lending and capital markets. He was in charge of the examination of numerous troubled financial institutions and of the information technology operations of three other banks.
TOM FIELD: Hello, this is Tom Field, Editorial Director with Information Security Media Group. We are talking today with Charles Vice, Commissioner for the Kentucky Department of Financial Institutions. Charles thanks for joining me.
CHARLES VICE: Thank you Tom.
FIELD: Just for context for our audience, maybe you could tell us a little bit about your agency, how many institutions you oversee and how you typically interact with them?
VICE: The Department of Financial Institutions is responsible for overseeing all state chartered banks that are in Kentucky. In addition, we have regulatory oversight for credit unions and we also regulate the securities activity within the state. On the banking side we have 156 state chartered banks throughout the state and our interaction with them occurs in a couple of ways. We perform safety and soundness examinations periodically. Those could be conducted either every 12 months or every 18 months and that is contingent upon the condition of the bank. If the bank needs a little more regulatory oversight we will go in every 12 months; if it is a strong institution we will go in every 18 months.
In addition to that we sometimes do visits, very short visits, with the bank, looking at some additional records to see how the bank is doing at that time. We would do those in between examinations if needed. In other ways we have pretty regular contact with our banks and bank presidents, if new issues arise we will send out e-mails and we will sometimes make phone calls with them directly. And the last way would be to attend trade meetings; sometimes I do presentations at trade meetings and I have a regular contact with the industry to try and figure out what the major trends are right now.
FIELD: Sure. Something tells me you have had a pretty active agency over the last year or so.
VICE: Very active. And I will tell you, it is an exciting time for banking in the fact that things are changing so much and there are so many things to address, look at and be concerned with. But I am very proud of the way the Kentucky banking industry has handled these challenging economic times.
FIELD: Now what are the major regulatory issues that you are focused on with your institutions this year?
VICE: A couple of areas, but the primary one right now would be mortgage and the mortgage origination process. That is really something that started all of this; it was the genesis for the major economic conditions that we are going through right now involving the poor underwriting practices that were used throughout the country, a lot of sub-prime lending.
The good thing is Kentucky really did not originate a large volume of sub-prime loans; our banks didn't participate in that activity and we didn't buy a lot of what is called secondary market loans or loans that have been packaged into an investment product.
We didn't have a significant impact of sub-prime lending, but I guess the best term would be alternative lending products. Commercial real estate is a pretty big concern right now and that is predominately because of the slow down of the economy. When economic activity declines then commercial real estate, i.e. subdivision developments and things like that, just don't sell out as quickly as expected. And in addition to that, vacancy rates go up a little bit in commercial real estate.
VICE: The last thing would be obviously just the economy in general. We are sitting here right now with an unemployment rate in the state of around ten percent, maybe a little bit more, and the national unemployment rate is really high.
We have a pretty significant reliance on the automobile industry in Kentucky. A lot of people don't realize that but we are the state that produces the third largest number of vehicles. We have a Ford plant in Louisville, a Corvette plant in Bowling Green and a Toyota plant in Georgetown. We are pretty dependent upon the automobile industry so when things don't go well within the automobile industry we struggle a little bit.
FIELD: That makes sense, and you are right, I didn't realize that. You have a lot in common with Michigan.
FIELD: Now what are the major information security issues you are focused on this year? I have to think that Red Flags compliance has to be right up there.
VICE: Yes it does. One issue, and again I think that all regulatory agencies deal with this, is we have access and obtain a lot of non-public information through the examination process and we safeguard that and make sure that remains safe. But one of the bigger issues that we are dealing with, and as a matter of fact right now one of our counties is dealing with this as well, is scams in general, fraud.
VICE: Because of the economic times it gives people a reason to go out there and commit fraud in order to get money. One of our banks in particular is dealing with a fraud scam right now and it happened through electronic media. That is a big concern right now.
FIELD: Do you see a predominate type of fraud or is it a mixture of ATM, ACH and all of the above?
VICE: Some deal with ACH and a lot of it is just identity theft. The federal agencies put out some guidance dealing with how to protect against that. The biggest thing with customers out there is just don't give your information to anybody that you are not 100 percent certain who it is. Now we have hackers stealing, committing identity theft, and with the electronic means of commerce these days that becomes a pretty easy avenue to commit fraud in. You are right with the ACH transfers, wire transfers as well. They open up and expose some banks to potential losses and also the customers of those banks.
FIELD: Given what we have talked about in terms of safety, soundness, information security and the economy, in what areas would you say that Kentucky's banking institutions are strongest right now?
VICE: Where we really have been fortunate is with high capital levels. We started out with very high capital levels but some of our banks have experienced some losses and that has gone down; but if you look at the national banking industry as a whole and compare it to Kentucky, we typically have higher capital ratios than most banks; higher capital ratios even with the contiguous states to us.
Our earning streams have been maintained. I don't want to say they are stable because we have seen our return on average assets for our state chartered banks fall from about 1.02 to about 0.8 right now. But when you compare that to the national falling from a little above 1 to 2, 0.3 looks pretty good.
For the most part we have some pretty conservative management of our financial institutions. Although you don't have the glamour of the upside of it, when the downside happens in the economy we don't get the significant impact of that either.
VICE: I think another, and I guess this could count as a strength, is some or most of our institutions aren't complex operations so from an IT perspective their IT is performed by servers. Because of that, it allows the server to have some expertise that maybe a smaller community bank couldn't afford to have. I do view that as a strength.
FIELD: Now flipside of that, where do you find the institutions are most challenged right now?
VICE: The asset quality. An asset for a bank would be a loan, so they are having problems with foreclosures right now, high past due rates, just a general slow down in the economy, high unemployment. People are having difficulty making payments.
In addition to that you have market risk with rates being held very low right now in an attempt to try to get the economy back on track, and because of that it doesn't have a negative impact on banks. The fact that a lot of the loans that banks keeps are tied to a national rate, such as the prime rate in the Wall Street Journal, when prime rates are really low that just means banks are earning less money on the assets they have.
With internet access a lot of banks are offering an internet option right now, where you can log in and do transfers and originate ACH's yourself, bill-pays, and with that I know that the laws out there talk about "know your customer" policies and procedures and every bank should be following these policies including "know your customer," meaning that they should know their customers they are dealing with and do some due diligence when they open up an account.
However, that is still not a safeguard or a complete safeguard against the scams that we have talked about. Someone could come in and open up an account, do most of their transactions over the internet and then their identity is stolen, their account information is stolen and someone who is going to commit a fraud can steal money without ever even entering the bank or meeting the individual that they stole their identity from. That is a really significant challenge that our banks are dealing with right now.
FIELD: Charles, one last question for you. You are talking to banking security leaders as you are through this interview today, and specifically to those in Kentucky, what would you like to see them pay the most attention to as we go into 2010?
VICE: When we come out of an economic crisis like this, especially when we have had several bad players in the market, what our financial institutions are going to have to deal with is a significant amount of regulatory reform. Some of it is going to be really good and some of it is not going to be so good. They are going to have to deal with a lot of new regulations, new procedures that are set up, and like I said, some of these will be good but some of these will be very costly and difficult to deal with.
With our banks and financial institutions that we deal with, the communities are really dependent upon them to be a stimulus for economic growth so we need banks to get back to functioning the way they were before the recession started because that is what is going to get us out of this difficult economic time, the banks getting back to lending more and stimulating the economy.
We have an elderly population. We have some baby boomers out there. Elderly abuse is pretty prevalent and that in and of itself, not only identity fraud but also to elderly abuse, creates a problem for financial institutions as well.
One thing that all of our banks and financial institutions will have to pay attention to going into 2010 when the recovery starts is controlling growth. We need banks out there lending money and stimulating the economy, but it is going to have to be in a controlled manner. What got us into this problem is uncontrolled growth and several institutions out there were pursuing very strong growth strategies and maybe not making the best underwriting decisions.
The fourth thing that we are definitely going to have to pay attention to is consumer protection. In many instances, if you look back on what caused this recession, a lot of it would be the lack of consumer protection and the consumer being sold product out there that they didn't know what the product was and it was a very complex instrument. Also, a lot of people got mortgages that they simply couldn't afford or shouldn't have had. That is going to be addressed through some of the regulatory reform.
Those are four areas in particular that I think we are going to have to pay attention to in 2010.
FIELD: You have got to be encouraged then by some of what you are hearing at least being discussed by the Obama administration?
VICE: I think it is a good first start. I don't know if I buy into the single regulatory concept yet, one federal regulator for consumer protection. But I think there definitely needs to be more done to protect the consumer in making sure that they understand the financial product that they are getting and to make sure that they are put into the right financial product for them. Some of these are not only sub-prime loans, but alternate loans such as alternate payments where they didn't have to make a payment if they didn't want to, as well as adjustable rate mortgages, and some people just got into products that they didn't understand or couldn't afford to pay for.
FIELD: Well Charles I appreciate your time and your insight today.
VICE: Thank you Tom. I really do appreciate the opportunity to speak to you.
FIELD: We have been talking with Charles Vice, Commissioner for the Kentucky Department of Financial Institutions. For Information Security Media Group, I'm Tom Field. Thank you very much.