Interim Charge: Review of Fees at State Regulatory Agencies

1
Interim Charge Review of Fees at State
Regulatory Agencies
Senate Finance Committee

• Texas Department of Banking
• Testimony of
• Stephanie Newberg and Gayle Griffin
• Deputy Banking Commissioners
• April 12, 2004

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Revenue Sources

• The Department is fully self-funded, or Revenue
  Neutral to the General Revenue Fund.
• Fees and assessments on regulated entities fund
  all of the agencys expenditures.
• The largest revenue source, bank assessments,
  accounts for approximately 76 of the
  Departments revenues.
• Special Audit (SA) fees, which include fees from
  prepaid funeral licensees, perpetual care
  cemeteries, sale of check licensees and currency
  exchange, transmission and transportation
  licensees, account for approximately 15 of the
  Departments revenues.
• By statute, the Finance Commission is limited to
  collecting fees and assessments that cover only
  the agencys direct and indirect expenditures
  related to supervision. Assessments are adjusted
  each year to harmonize the revenue stream with
  expenditures, both direct and indirect.
• A detailed listing of fees is provided on page 14.

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Revenue Sources
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Expenditures for Effective Supervision

• The Departments expenditures are mainly
  personnel related.
• Salaries and other personnel expenses are
  consistently 85 of total expenditures.
• Travel related expenses, mainly to conduct
  examinations, are 10 of total expenditures.

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Profile of Regulated Entities
Information as of December 2003. Includes all
State Banking Activity.
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Issues Affecting Bank and Trust

• Supervision Entity supervision continues to
  increase in scope and complexity. Identifying
  and assessing risk factors is an ongoing process
  due to technology advances competitive factors
  changing economic conditions and an ever fluid
  federal legislative environment. Increased
  supervision is occurring in (i) anti-terrorist
  and money laundering detection (ii)
  strengthening corporate governance practices
  (iii) protecting consumer information (iv)
  credit underwriting, (v) overdraft protection
  plans, and (vii) interest rate risk analysis.
• Competition Mergers and acquisitions, de novo
  charters, branch expansion, interstate branching,
  and activities of nonbank lenders and
  subsidiaries affect competition.
• Industry Changes Evolution of the industry into
  a greater diversity of financial products is
  changing the dynamics of the participants.
• Consumer Protection Proper internal controls
  are needed to assure financial privacy and
  inhibit identity theft. Abusive credit practices
  should be eliminated, and compliance with home
  equity lending laws must be enforced.

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Issues Affecting Bank and Trust

• Technology The industries supervised by the
  Texas Department of Banking are advancing on
  numerous technological fronts, and each front
  presents new elements of risk to manage, monitor,
  and control. Electronic bill paying, access to
  sensitive customer information, enhanced
  capabilities of automated teller machines
  networks and automated clearing house systems,
  and electronic check conversion are becoming
  staple financial services.
• Regulatory Cooperation To effectively protect
  the citizens of Texas, promote fair competition,
  and foster a safe and sound financial system, the
  Department must continue to partner with federal
  regulatory agencies in the supervision of Texas
  chartered state banks. In addition, the Texas
  Department of Banking will coordinate with
  out-of-state regulators where appropriate.
•  

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Issues Affecting Special Audits

• Evolving Methods for Transferring Funds The
  increasing capabilities of automated teller
  machine networks and automated clearing house
  systems, coupled with the rapid expansion of the
  Internet and stored value cards, have resulted in
  a proliferation of sophisticated methods of
  transferring money for consumers. 
• Industry Investments Licensees continue to
  explore and seek Departmental approval to invest
  consumer funds into riskier and more complex
  investments to maximize their rate of return. 
• Money Service Businesses (MSBs) Bonding MSBs are
  finding it increasingly difficult to locate
  insurance companies willing to issue surety
  bonds, due to the inherent risk associated with
  these types of businesses. 
• Federal Legislative Developments The
  complexities and changing requirements of the
  Patriot Act, Bank Secrecy Act, and other
  Anti-Money Laundering Federal Regulations require
  constant refinement of our examination procedures
  to ensure licensee compliance. 
•  
• Enforcement Actions The Department has found it
  necessary to impose administrative penalties for
  licensees that engage in a pattern of
  violations to encourage appropriate corrective
  action.

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A Sound Financial System is Important to Texas

• Texas citizens and Texas business owners need the
  states assurance that
• Their money is safe and secure
• Their financial affairs are being handled
  honestly and fairly
• Their personal information is being properly
  safeguarded and
• Their bank complies with the law.
• Public confidence creates economic opportunities
  
• Consumer spending increases for goods and
  services
• New investments are made in stocks, bonds, and
  real property
• Business lending expands and
• Increases in business activity lead to new
  employment opportunities.
• Well managed financial institutions are capable
  of extending loans and other forms of credit to
  facilitate business growth and consumer
  purchases.
• State-chartered banks are a primary source of
  credit for small businesses, which employ most of
  the working population in Texas.
• Effective regulation reduces instances of
  consumer fraud, money laundering, and other
  financial improprieties.
• A continuing regulatory presence, coordinated
  with law enforcement and other regulatory
  agencies, is needed to protect Texas citizens.

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Effective Regulation is Important

• Effective regulation promotes strong and healthy
  institutions based in Texas that can offer
  financial leadership and guidance that best
  benefits Texas.
• Prevents unnecessary or unabated deterioration in
  the states financial service industries.
• Economic prosperity fosters competitive markets,
  which benefits all Texans.

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Supplemental Information
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Statutory Mandates

• Banks, Trust Companies, and Offices of Foreign
  Bank Agencies

• Chapters 31 and 181 of the Texas Finance Code
  require the Banking Commissioner to examine each
  state bank and state trust company annually or
  more often as the Banking Commissioner considers
  necessary to safeguard the interest of
  depositors/clients, creditors, shareholders,
  participants and participant-transferees. In
  2001, the Texas Finance Code was amended to
  harmonize with corresponding federal regulation,
  allowing the commissioner to extend an
  examination up to an additional six months. 
• Chapter 204 of the Texas Finance Code requires
  that the Banking Commissioner examine each Texas
  state branch, agency or representative office of
  a foreign bank annually or more often as the
  Banking Commissioner considers necessary to
  determine if the office is operated in a safe and
  sound manner.

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Statutory Mandates

• Prepaid Funeral Contract Sellers, Perpetual Care
  Cemeteries, Currency Exchange Businesses, Sale of
  Check Licensees, and Private Child Support
  Enforcement Agencies

• Chapter 154 of the Texas Finance Code requires
  that the Banking Commissioner examine each
  prepaid funeral contract seller annually or more
  often as deemed necessary to protect the prepaid
  funds and to assure that the contracted services
  and merchandise are provided at the time of
  death.
• Chapter 712 of the Texas Health and Safety Code
  requires that the Banking Commissioner examine
  each perpetual care cemetery annually or more
  often as deemed necessary to protect and
  safeguard the perpetual care trust funds and to
  assure that the fund income is used to maintain
  and support cemetery maintenance.
• Chapter 153 of the Texas Finance Code requires
  that the Banking Commissioner examine each
  currency exchange, transportation and
  transmission licensee annually to protect and
  safeguard customer funds and prevent money
  laundering and funding of terrorist activities.
• Chapter 152 of the Texas Finance Code requires
  that the Banking Commissioner examine each sale
  of check licensee annually or more often as
  deemed necessary to protect and safeguard
  customer funds and prevent money laundering and
  funding of terrorist activities.
• Chapter 396 of the Texas Finance Code requires
  the Banking Commissioner to monitor private child
  support enforcement agencies through registration
  and investigation of consumer complaints.