This is the second consecutive year the Boston-based Santander Holdings USA (SHUSA) has failed the Comprehensive Capital Analysis and Review (CCAR) on qualitative grounds.

The Fed did not object to Santander’s capital plan on quantitative grounds and did not object to dividend payments on SHUSA’s outstanding class of preferred stock. As of Sept. 30 of last year, the company’s Tier 1 common ratio was 11 percent. Under the Fed’s severely adverse scenario used in this round of stress testing, that ratio would decline to a minimum of 9.4 percent.

However, the Fed did object to Santander’s plan based on what it characterized as “widespread and critical deficiencies across [its] capital planning processes.” More specifically, regulators zeroed in on deficiencies in governance, internal controls, risk identification and risk management, management information systems and assumptions and analysis supporting its capital planning process.

Santander’s management seemed unruffled by the news in a statement the company put out concerning the CCAR results.

“These results confirm that Santander Holdings USA maintains capital well above regulatory minimums throughout the severe stress environments presented by the Federal Reserve,” CEO Scott Powell said in the statement. “However, the qualitative assessment highlights that we still have meaningful work to do to meet our regulator’s expectations and our own standards of excellence.”

The Fed also objected to Deutsche Bank Trust Corp.’s capital plan on qualitative grounds, citing problems with the company’s risk-identification, measurement and aggregation processes, its approaches to loss and revenue projection and its internal controls.

Elsewhere in the CCAR results, the Fed issued a “conditional non-objection” to BofA’s capital plan. While the Fed didn’t technically object to the company’s capital plan, it is nonetheless requiring BofA to submit a new capital plan by the end of the third quarter to address weaknesses in its capital planning process. In the full CCAR results, the Fed specified problems with the company’s loss and revenue modeling practices and internal controls.

If BofA does not address those issues to the Fed’s satisfaction, the regulator warned, it expects to object to the resubmitted plan and potentially restrict the company’s capital distributions.

Under the Fed’s severely adverse scenario, BofA’s Tier 1 common ratio would fall to 6.8 percent.

The Fed also said that under the severely adverse scenario, Goldman Sachs, JPMorgan Chase and Morgan Stanley were projected to have at least one minimum post-stress capital ratio lower than regulatory minimum levels based on their original planned capital actions. The Goldman Sachs Group Inc., fell below the minimum required post-stress tier 1 risk-based and total risk-based capital ratios; JPMorgan Chase & Co. fell below the minimum required post-stress tier 1 leverage ratio; and Morgan Stanley fell below the minimum required post-stress tier 1 risk-based and total risk-based capital ratios.

Boston-based State Street Corp. would see its Tier 1 common ratio fall to 10.8 percent under the severely adverse scenario. The company yesterday announced that it would increase its quarterly common stock dividend from 30 cents to 34 cents per share beginning in the second quarter.

The Fed noted in its review that U.S. financial institutions had substantially increased their capital levels since the first round of stress tests in 2009. Since that time, the common equity capital ratio of those 31 bank holding companies has increased from 5.5 percent to 12.5 percent, representing an increase of more than $641 billion to $1.1 trillion.

The institutions evaluated during this round of stress testing represent more than 80 percent of domestic banking assets, or $14 trillion at the end of last year.

The company has added a Check Fraud Manager, Payment Fraud Manager, Customer Risk Manager and AML Risk Manager, each of which incorporates real-time behavioral risk monitoring, advanced predictive analytics and real-time profile development on any entity, according to a press release.

“Industry professionals are increasingly conscious of the impact risk management has on the customer experience and are seeking enterprise-wide platforms that work together seamlessly to provide the highest protection with the least customer impact,” Tim Grace, senior vice president and general manager of financial crime risk management at Fiserv, said in a statement. “Organizations also want platforms that are flexible enough to accommodate new strategies without incurring significant customization costs. Our new solutions and Financial Crime Risk Management platform facilitate a customer centric, enterprise approach in risk management.”

U.S. Securities and Exchange Commission Chair Mary Jo White said on Tuesday she supports crafting new rules to harmonize the differing standards that govern how retail brokers and advisers offer investment advice.

White’s announcement, made at a Securities Industry and Financial Markets Association conference (SIFMA) in Arizona, mark the first time she has offered an opinion on the controversial subject since taking charge of the SEC in 2013.

“That’s what I think is the right thing to do,” said White, according to a video of the event.

White did not offer many details. But generally the rule would harmonize disjointed standards of care between investment advisers, who must act in a client’s best interest, and brokers, who are held to a lower “suitability” standard.

Some say these differences may confuse investors and fuel conflicts, because brokers may sell products that benefit their bottom lines even if they are not the best choice for clients.

In addition, White said any new rules must also accompany a program to beef up examinations of advisers by creating a third-party compliance program to help supplement the SEC’s own exams.

Currently, the SEC is able to examine only a fraction of the country’s advisers every year. Brokers get inspected more frequently because they have a self-regulatory organization.

White’s comments could influence a raging debate in Washington over parallel rules that the U.S. Department of Labor is planning to release for brokers who advise clients on individual retirement accounts.

The Labor Department’s rules would aim to reduce conflicts of interest and ultimately cut back on the fees charged to investors by holding retail brokers to a higher “fiduciary” standard, meaning they would be required to put their client’s financial interests first.

The SEC and the Labor Department are each governed by different laws and can act independently, but many brokers including Wells Fargo, Charles Schwab and Raymond James would be covered by both rule sets.

Many Wall Street trade groups have decried the Labor Department’s actions, saying the SEC should take the lead.

Brokerages also prefer the SEC because the 2010 Dodd-Frank Wall Street reform law explicitly protects their ability to earn commissions.

The Labor Department, while under pressure to preserve commission-based compensation, does not face the same legal obligation.

Several years ago, the Labor Department scrapped a first draft of a proposed fiduciary rule after the industry complained it would limit investors’ access to retirement investment products and curb brokers’ compensation.

The SEC, by contrast, has been studying the issue, but until White’s comments Tuesday, the agency had not signaled whether it might proceed with its own rules.

Last month, President Barack Obama waded into the debate in an effort to rally support for the Labor Department, which is expected to release a new draft in the near future.

Ira Hammerman, the general counsel at SIFMA, said in an interview with Reuters that he is encouraged by White’s comments. “We would hope that the SEC’s moving forward on this would provide further confirmation that the DOL should not move forward,” he said.

SIFMA has been among the many staunch critics of the Labor Department’s efforts.

On Monday, it unveiled a study that found that the White House’s economic analysis justifying the Labor Department’s rule was riddled with errors.

White House spokesman Josh Earnest brushed aside the study’s findings in a briefing with reporters on Tuesday and reiterated Obama’s call for new rules. “This seems like a pretty common-sense thing,” he said.

Whether the SEC’s action will influence the Labor Department’s rule remains to be seen.

The SEC is only in the early stages. White said Tuesday that the task is complex and that she will start discussing it with commissioners.

Two of them – SEC Republican Commissioners Daniel Gallagher and Michael Piwowar – have previously raised strong reservations about crafting fiduciary rules.

Source: Reuters

Elmhurst Dairy and its affiliates, Worcester Creameries Inc. and Dora’s Naturals, will use the financing package to expand their operations

Gerard Nadeau, Rockland’s head of commercial lending, described the package as a combination of an asset-based line of credit to finance receivables, a term loan to refinance equipment and a refinance of company real estate.

He said the dairy company had had occasion to revisit its finances as it expanded its customer base, and he credited Mike Pandolfi, first vice president of asset-based lending, with originally nurturing the bank’s relationship with Elmhurst Dairy.

Rockland Trust provided $25 million of the total credit facility and roped in HVB Capital, Hudson Valley Bank’s asset-based lending arm, on the rest.

“We try to find banks where we have one-on-one personal relationships that have a history of standing with companies as they go through any potential growth pains. We try to build on our personal relationships at banks that have steady management and stability in the marketplace,” Nadeau said. “It’s not any different than our relationships with our borrowers.”

The Fed is inviting all interested stakeholders with payments knowledge and experience, as well as the time to commit, to register for the Faster Payments Task Force or the Secure Payments Task Force.

Per the Fed’s announcement: “Participants on the Faster Payments Task Force will identify and evaluate alternative approaches for implementing safe, ubiquitous, faster payment capabilities in the United States. The Secure Payments Task Force will advise the Federal Reserve on payment security matters, consult on security aspects of the Faster Payments Task Force work, and help determine priorities for future action to advance payment system safety, security and resiliency.”

“Diverse and committed membership will ensure a broad range of perspectives are considered as we pursue improvements to the U.S. payment system,” Esther George, president of the Federal Reserve Bank of Kansas City and executive sponsor of the effort, said in a statement. “We welcome and actively seek participation from the entire spectrum of payment system participants, including businesses and consumers.”

The Fed plans to field questions during two Task Force teleconferences set for March 20 and March 31. More information is available here.

Long live the branch! The branch is here to stay. At least, that might be your conclusion if you put any store by a recent analysis of bank branch distribution out of the Federal Deposit Insurance Corp. (FDIC).

The report’s title pretty much spells out the FDIC’s thesis: “Brick-and-Mortar Banking Remains Prevalent in an Increasingly Virtual World.” In the study, the agency examined the question of whether the rise of ATMs, online and mobile banking and other technological innovations in the financial world have put a damper on branch formation – and concludes that they haven’t.

The FDIC supports its hypothesis with some pretty heavy numbers. Between 1935 and 2014, the total number of brick-and-mortar bank locations has increased by 67,222, or 244 percent, nationwide.

The agency divided the interval between 1935 and 2014 into two periods of expansion, between 1945 and 1989 and again from 1995 through 2009, bracketed by three periods of contraction. On the whole, far more offices were added during expansion than removed during contractions, it concluded.

The FDIC considered the notion of branch density, or the number of bank offices per 10,000 people, and also concluded that bank office growth outpaced population growth over the long term.

While the report doesn’t break down the number of branches in Massachusetts specifically, other FDIC data show the Bay State had 2,227 branches as of June 30, 2014, down just slightly from 2,245 in 2009, but up from 1,968 in 1994, the earliest year for which that data is available.

According to the FDIC, four main factors influenced the distribution of bank branches since 1987: population and demographic shifts, banking crises and legislative changes.

Robert M. Mahoney, president and CEO of Belmont Savings Bank, would add another to that list: interest rates.

“When interest rates are low, people don’t open branches. When interest rates are high, people open branches. Branch growth has been slow because interest rates are low,” he said. “The money is not worth as much.”

Dissenting voices

Brett King, the founder of Moven and recent author of “Breaking Banks,” cautioned against reading too much into the FDIC’s analysis.

“My disappointment with the FDIC was … there was no mention of risk factors, factors that could affect branch numbers and branch density in the future. In that way, I think the report was a fait accompli,” he said. “I thought it was very disappointing that such a critical part of the U.S. banking infrastructure would be so naïve.”

King thinks the agency ignored a host of other data, including consumer behavior that’s shifting away from the branch as transactional hub and toward the branch as a service center.

“When [customers] go to the branch, they go because they have a problem they couldn’t fix on digital. Either you’re going to be giving them technical advice, or you’re getting into specifics about a credit facility or managing their money or something like that, but it becomes a service hub in the future,” he said. “The overarching trend will not just be branch closures, but for many of those that remain it will be shrinking the square footage down.”

And that appears to be the direction in which many banks are moving anyway. While King’s own discussion focused on giants like Chase and Bank of America, banks closer to home have also experimented with smaller and less traditional branches.

When Eastern Bank opened a second branch on the campus of Northern Essex Community College in Lawrence last fall, it partnered with a local pizzeria and put tablets and charging stations in full view of its front window, hoping to lure college kids in need of a bite to eat or an outlet to charge their phone.

And when Belmont Savings opened new branches over the past few years, it located them inside of supermarkets, a strategy Mahoney credited with boosting the bank’s retail deposits.

Even though it offers a host of online and mobile banking products, Robert DeGiovanni, Eastern’s director of retail banking, said the vast majority of the bank’s new checking accounts are still opened in the branch. Like King, he sees the branch shrinking down and moving from a transactional function to more of a sales and service function.

“I think the physical presence is incredibly important. Customers, when they’re looking for a new bank, may do their research online and may start with branches close to where they live,” he said. “I think if you don’t have that physical branch, you’re probably not in that consideration, so the branch itself it still very important.”

Laura Alix is a staff writer for The Warren Group. She may be reached at lalix@thewarrengroup.com.

Recovering from a business interruption requires planning ahead to keep focus during the aftermath of an outage. Companies can prepare for the possibility of adverse events that interrupt their operations by developing a business impact analysis (BIA) and conducting a risk assessment (RA).

Developing a business impact analysis

Documenting the recovery effort in advance can save crucial time during the critical hours of potentially losing business following an event. Undergoing a BIA involves taking an inventory of current business functions, prioritizing them and then determining what is needed to keep them going in the event of a business interruption.

The first step to conducting a BIA is to list all business functions and determine how important they are to normal daily operations. Next, it is important to figure out how long a company can wait after a business interruption before getting these crucial processes up and running again. This involves documenting what impact the company would experience during the time these functions were not recovered. Would the company suffer significant financial consequences? Would there be regulatory fines imposed? What reputational risk would the company endure if they were not able to operate under “business as usual” circumstances? The processes that would incur the most impact if not recovered would be prioritized as the first to be recovered after a business interruption.

Performing a BIA also documents the critical resources that support these processes, including people, systems, forms, supplies and equipment.

Companies that want to conduct this process effectively might consider utilizing a BIA questionnaire. Running through the questions contained in a BIA questionnaire allows a firm to investigate how it could be affected by a major event. This questionnaire is answered most thoroughly when a company meets with people who have insight into the key operations of the firm.

Conducting a risk assessment

Before a BCP is created, a firm must conduct a risk assessment in order to identify the areas of exposure and all possible threats that could potentially cause a business interruption.

Types of threats that should be considered include natural, manmade, technological, loss of utilities, and pandemic in nature. Threats should be analyzed to determine the likelihood of their occurrence and the level of impact to the organization if they were to occur. Consideration should also be given to what mitigation steps have been taken to lessen the likelihood of occurrence and/or impact.

Threats that result in high risk ratings should be reviewed with management to determine the need for additional mitigation strategies to lessen the possibility of the threat causing a business outage.

Business continuity plan

Companies that want to be well-prepared in the event that their operations run into significant challenges will benefit from having a formalized business continuity plan (BCP) in place.

A BCP contains a detailed outline of the processes that a company should implement following an outage, including:

• How to respond to specific situations
• The best way to assess damages
• Deciding whether to declare an emergency
• Communicating internally and externally during and following an event
• How to recover business operations in an efficient, prioritized fashion
• How to restore to business as usual

The BIA and RA act as the foundation of the BCP. The RA will help identify what types of scenarios a company should consider while documenting response strategies. Threats that have the highest risk ratings are most likely to cause a business interruption. The BIA will help with documenting recovery procedures for the most critical of processes and the resources that support them. It allows the company to properly document a prioritized recovery.

The Federal Emergency Management Agency (FEMA) has provided best practices, available on its website, on the steps that should be taken once a BCP has been developed. The organization has advised that companies distribute the plan’s information to members of management, and also compose a business continuity team among the staff.

It has also been recommended by FEMA that institutions hold several copies of the plan in an emergency operations center to ensure that their staff has access to all the information they need to execute the plan if an emergency arises.

Common operational challenges

There are a wide range of financial and operational issues that can occur as a result of a business interruption. Expenses could skyrocket – or alternatively, both sales and revenue could come to a halt.

While these are the types of challenges that will show up on a balance sheet, numerous other problems can happen in the event that a natural disaster or other business interruption occurs. For example, the customer base of an institution could easily be damaged if the company fails to deliver on its contractual obligations. The reputation of a firm could also suffer in the event that the organization is not adequately prepared to respond to a business interruption. While the impact of this particular exposure may not be immediate, it can be substantial over time. Completing a BIA, RA and a BCP in advance will help identify areas of exposure and potential challenges, saving money and time during the recovery process in the event that a business interruption occurs.

Tracy L. Hall, MBCP, is IT assurance manager with Wolf & Co. For more information, email thall@wolfandco.com or call (413) 726-6884.

In 2015, vendor management may be the new black. Or, if we’re going to use an industry-specific example, the new QM rule. That is to say, it’s an issue to watch this year.

Of course, vendor management is nothing new for the banking industry. What is new is the increased regulatory scrutiny in this area, which has been ramping up since a joint regulatory review and ensuing enforcement actions in 2011 of several large mortgage servicers.

The most recent turning point, according to many, is OCC Bulletin 2013 – 29, issued in October 2013, which laid out agency guidance on managing risks associated with third-party relationships.

And while community banks aren’t regulated by the OCC, where the Office of the Comptroller of the Currency goes, the other regulators tend to follow, observers say.

“The fear is that if this is implemented in accordance with its terms and it spreads to the FDIC and state chartering authorities, it’s going to be quite a regulatory burden – not only for the banks involved, but also for the third-party vendors involved,” said Kevin Handly, an independent Boston-based banking lawyer and professor of banking law at Boston University’s law school.

Echoing a theme that tends to reverberate throughout the banking industry, Handly said that burden will be the most onerous for smaller, third-party vendors. A service provider could potentially be asked to open their doors and books to regulators during a bank examination, sucking up time and resources, and smaller companies and startups may ultimately decide it’s not worth it at all to do business with banks.

On the flipside, banks could decide it’s not worth contracting with a promising startup or small business that’s not already entrenched in the financial services industry.

Handly also said he is concerned that the OCC’s guidelines do not specify just how far regulators or bankers must go in determining whether a given vendor presents too much risk. If, for example, a vice president at a third-party security firm has a 10-year-old misdemeanor, is that grounds for dismissal? Must bankers run all their vendors through the OFAC’s “black list?”

“It is a potential huge can of worms,” he said.

A critical question

One of the key questions surrounding the subject of vendor management is how banks define vendors as “critical” or not. The OCC has laid down its expectation that banks identify those third-party service providers engaged in “critical activities” and hold them to more rigorous standards than those engaged in less critical functions.

While the agency has not laid down exact criteria for what constitutes “critical activities,” it outlines “critical” as meaning engaged in significant functions, like payments, clearing and information technology, or anything else that could incur “significant risk” if the vendor falls short of expectations, have “significant customer impacts,” or have a major impact on bank operations.

“Our expectations are that management and the board of directors are able to identify what are those critical services,” said Beth Dugan, the OCC’s deputy comptroller for organizational risk. “They must make that determination of themselves for their given situation.”

When asked about how often regulators look into the books of third-party service providers, Dugan demurred, saying, “to be honest, I don’t think it’s a very frequent [occurrence].”

Some community bankers say vendor management doesn’t have to be that complicated or onerous a task.

Belmont Savings Bank, for instance, ranks its vendors A, B or C, according to their exposure to sensitive information, President and CEO Robert M. Mahoney said. The A vendors would be those with access to the most sensitive customer information, like account numbers or balances and Social Security numbers, while B vendors might have some exposure to semi-sensitive information, like customer home addresses, and C vendors would include, say, the guy who clears the snow from the parking lot in the winter.

Whitman-based Mutual Bank does something similar, ranking its vendors according to high, medium, low or non-existent risk, said CEO Glen S. White.

Both CEOs estimated they did business with maybe four or five vendors that warranted the highest risk rating, but neither seemed especially concerned that regulatory pressure vis a vis vendor management might be unduly burdensome in the year ahead.

That’s partially because, both agreed, for those most critical functions, they tended to contract with service providers heavily steeped in the banking industry – not with vendors who had just two or three bank clients.

Mahoney added, “Vendor management has been top of mind for three or four years; ranking your vendors, determining which have access to highly sensitive information, which don’t, visiting them, monitoring them, understanding their disaster recovery plans … If the OCC had to tell me to do that, then shame on me.”

Laura Alix is a staff writer for The Warren Group. She may be reached at lalix@thewarrengroup.com.

Positioning itself as a “catalyst for collaboration,” the Federal Reserve System recently laid out its vision for a payments utopia and outlined several strategies for getting there, including the creation of two industry task forces sometime early this year.

The payments system of the future would be fast, safe and efficient. U.S. consumers would have better options for sending payments across borders, and players in the payments system would collaborate to make sure consumers could send payments seamlessly across a myriad of providers, the Fed wrote in its recent paper, “Strategies for Improving the U.S. Payment System.”

Getting there, the Fed said, will mean engaging with stakeholders on initiatives to improve the payments system, identifying approaches to that goal, working to reduce fraud risk and advance safety in the system, achieving end-to-end efficiency for domestic and cross-border payments and enhancing Federal Reserve Bank payments, settlements and risk-management services.

One of the main initiatives underpinning its lofty goals is the creation of two payments-related task forces representing financial institutions, payments processors and other industry players. The Fed said in its paper that it intends to establish the task forces in the early part of 2015.

Speaking in a webcast discussing the Fed’s vision, Esther George, president of the Federal Reserve Bank of Kansas City and a member of the Federal Reserve’s Financial Services Policy Committee, said, “One task force will lay the groundwork for developing faster payment capabilities for the United States and to identify solutions for a broadly accessible, faster payment system, which could involve creating new systems or enhancing existing infrastructure. A second task force will focus on payment security, with diverse stakeholder representation and will advise the Federal Reserve on security issues and help us identify priorities that require action.”

The Fed’s declaration of intent was met with praise from players in the payment system. The National Automated Clearinghouse Association (NACHA) applauded the Fed’s vision and also sought to draw attention to its own Same Day ACH initiative, its own phased approach toward same-day settlement capability.

Payments tech giant Fiserv also cheered the Fed’s vision.

“We absolutely believe that the Fed is doing the right thing in getting a variety of representatives in the payments industry to have a conversation around these different strategies,” said Matt Wilcox, Fiserv’s senior vice president of marketing strategy and innovation. “I don’t think they’ve outlined a solution to a problem, but they’ve outlined that they can get these groups to come to it and have a conversation.”

Encouraging Innovation

To be sure, the vision the Fed lays out in this strategy paper is a grand one. It took two years of putting its head together with just to get to this point, and the Fed stressed in its communications that it was not looking to build its own payments infrastructure unless it could be absolutely sure the private sector would not meet that need.

“There’s a lot of innovation going out there in the private sector, and private sector companies are better set up to innovate and make quick decisions about developments in the market than any government agency is,” Federal Reserve Board Governor Jerome H. Powell said in the webcast. “We don’t want to unnecessarily broaden our role and thereby unintentionally get in the way of that kind of innovation.”

For its own part, the Fed has pledged to expand the operating hours and capabilities of its National Settlement Service, expand its international payment services and expand its own risk-management services.

For a payments technology provider like Fiserv, one of the big challenges is something Wilcox refers to as interoperability, meaning that users can send each other payments regardless of the network they use. A consumer who uses Fiserv’s Popmoney, for instance, isn’t limited to sending those funds only to others who use Popmoney.

“The reach isn’t what it needs to be,” Wilcox said. “From a barrier to entry perspective, it’s difficult when you have multiple networks and multiple entities involved.”

Describing Fiserv’s own vision as being “in lockstep with the Fed” but stressing that it would not wait on the Fed, either, Wilcox said Fiserv had already partnered with several card networks and other payments networks in an effort to increase that interoperability they want.

“Creating additional collaboration in the industry and having these types of conversations, which I think is what the Fed is going to do. I think that’s exactly what we need their help with,” he said. “We were excited to see what they’ve come out with and we’re excited to participate in the next steps.”

Laura Alix is a staff writer for The Warren Group. She may be reached at lalix@thewarrengroup.com.