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Do Banks Need a Holding Company?

the-bank-accountOn April 11, 2017, Bank of the Ozarks announced that it would be completing an internal corporate reorganization to eliminate its holding company.  As a result, it will continue as a publicly-traded, stand-alone depository bank, without a bank holding company.

In this episode of The Bank Account, Jonathan and I discuss the advantages and disadvantages of the bank holding company structure.  Specific topics include:

  • praise for Bank of the Ozarks innovative approach to further improve its already impressive efficiency,
  • a review of the existing landscape of holding company and non-holding company structures,
  • activities that may require a holding company,
  • size-related thresholds impacting holding company analysis,
  • charter and corporate-governance related elements to the analysis, and
  • the impact the absence of a holding company may have on merger and acquisition activity.

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Do you get Bragging Rights if the Malware Infecting your Computer was Named after Zeus?

Over the last decade as the specter of cyber attacks has increased dramatically, financial institutions have been encouraged to look into the use of cyber fraud insurance as one means of minimizing risk. A recent decision by the 8th Circuit provides an interesting opportunity to see how such policies are going to be interpreted by the courts.

In 2011, an employee at Bellingham State Bank in Minnesota initiated a wire transfer through the Federal Reserve’s FedLine Advantage Plus system (FedLine). Wire transfers were made through a desktop computer connected to a Virtual Private Network device provided by the Federal Reserve. In order to complete a wire transfer via FedLine, two Bellingham employees had to enter their individual user names, insert individual physical tokens into the computer, and type in individual passwords and passphrases. In this instance the employee initiated the wire by inputting the passwords both for herself and the other employee and inserted both of the physical tokens. After initiating the wire the employee left the two tokens in the computer and left it running overnight. Upon returning the next day the employee discovered that two unauthorized wire transfers had been made from Bellingham’s Federal Reserve account to two different banks in Poland. Kirchberg was unable to reverse the transfers through the FedLine system. Kirchberg immediately contacted the Federal Reserve and requested reversal of the transfers, but the Federal Reserve refused. The Federal Reserve, however, did contact intermediary institutions to inform them that the transfers were fraudulent, and one of the intermediary institutions was able to reverse one of the transfers. The other fraudulent transfer was not recovered.

Bellingham promptly notified BancInsure of the loss and made a claim under their financial institution bond which provided coverage for losses caused by such things as employee dishonesty and forgery as well as computer system fraud. After an investigation, it was determined that a “Zeus Trojan horse” virus had infected the computer and permitted access to the computer for the fraudulent transfers. BancInsure denied the claim based on several exclusions in the policy including employee-caused loss exclusions, exclusions for theft of confidential information, and exclusions for mechanical breakdown or deterioration of a computer system. In essence, the policy does not cover losses whose proximate cause was employee negligence or a failure to maintain bank computer systems. Bellingham contested the denial and brought suit in federal court for breach of contract.

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Thoughts on Payment Systems for Banks

the-bank-accountJonathan and I sat down with our colleague, Stan Koppel, on Thursday, April 13th to discuss the intersection of payment systems and banks.   Stan joined Bryan Cave LLP following a 28-year stint with VISA, where he was originally the third lawyer employed.  In this episode of The Bank Account, Stan shares his background and touches on what’s working now and what’s ahead in the payments world for financial institutions.

Topics covered include banking the unbanked, tokenization, the blockchain and machine learning!  Preview of a hot take from Stan… “blockchain is more distracting than disruptive.”

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FRB Lifts Threshold for Financial Stability Review

In its March 2017 approval of People United Financial, Inc.’s merger with Suffolk Bancorp (the “Peoples United Order”), the Federal Reserve Board eased the approval criteria for certain smaller bank merger transactions by expanding its presumption regarding proposals that do not raise material financial stability concerns and providing for approval under delegated authority for such proposals.  The Dodd-Frank Act amended Section 3 of the Bank Holding Company Act to require the Federal Reserve to consider the “extent to which a proposed acquisition, merger, or consolidation would result in greater or more concentrated risks to the stability of the United States banking or financial system.”

In a 2012 approval order, the Federal Reserve established a presumption that a proposal that involves an acquisition of less than $2 billion in assets, that results in a firm with less than $25 billion in total assets, or that represents a corporate reorganization, may be presumed not to raise material financial stability concerns absent evidence that the transaction would result in a significant increase in interconnectedness, complexity, cross-border activities, or other risks factors.  In the Peoples United Order, the Federal Reserve indicated that since establishing this presumption in 2012, its experience has been that proposals involving an acquisition of less than $10 billion in assets, or that results in a firm with less than $100 billion in total assets, generally do not create institutions that pose systemic risks and typically have not involved, or resulted in, firms with activities, structures and operations that are complex or opaque.

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Landscape of the U.S. Banking Industry

From 2006 through 2016, the number of insured depository institutions in the United States has fallen from 8,691 charters to 5,922, a decline of 2,769 charters or a 32% loss.  This headline loss number is worth talking about, but is neither news nor new.  The loss of charters is a frequent source of discussions around bank board rooms, stories from trade press, and chatter at banking conferences.  The number of insured charters has also been in steady decline, with at least 33 years of declining numbers.

However, a deeper dive into the numbers reveals some unexpected trends below the headline 32% loss of charters.

the-bank-accountNote:  We’ve also recorded an accompanying podcast for The Bank Account on the Truth About Industry Consolidation.  The podcast contains additional analysis to the numbers presented here, and is a useful addition, but not a substitute, to this content.  In addition to listening to this episode, we encourage you to click to subscribe to the feed on iTunes, Android, Email or MyCast. It is also now available in the iTunes and Google Play searchable podcast directories.

Links to items mentioned in the podcast, or otherwise potentially of interest on the topic:

 

State of Banking Landscape as of December 31, 2016

As of December 31, 2016, we had 5,922 institutions with $16.9 trillion in total assets.

The four largest depository institutions by asset size (JPMorgan, Wells Fargo, Bank of America and Citi) hold $6.84 trillion in assets, or 40.5% of the industry’s assets.

There are 111 additional banks that have assets greater than $10 billion, holding $6.98 trillion.  That’s 1.9% of the total charters, holding 81.9% of the aggregate assets.

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Bank Website ADA Litigation Update

Court Dismisses Website Accessibility Case as Violating Due Process, Since DOJ Still Has Not Issued Regulations

Recent court decisions from California and Florida may provide ammunition to retailers battling claims that their websites and mobile applications are inaccessible in violation of Title III of the Americans With Disabilities Act (the “ADA”). As we reported in a previous blog post, banks and other businesses have faced a wave of such demand letters and lawsuits.  Most of these claims settled quickly and confidentially.

However, a California district court recently granted Dominos Pizza’s motion to dismiss under the primary jurisdiction doctrine, which allows courts to stay or dismiss lawsuits pending the resolution of an issue by a government agency. In Robles v. Dominos Pizza LLC, U.S. Dist. Ct. North Dist. Cal. Case No. CV 16-06599 SJO, the court held it would violate Domino’s due process rights to hold that its website violates the ADA, because the Department of Justice still has not promulgated regulations defining website accessibility – despite issuing a notice of proposed rulemaking back in 2010.

The court stated that the DOJ’s application of an industry standard, the Website Content Accessibility Guidelines 2.0 (WCAG 2.0), in statements of interest and consent decrees in other cases does not impose a legally binding standard on all public accommodations. It also noted that those consent decrees indicated flexibility to choose an appropriate auxiliary aid to communicate with disabled customers, and suggested that Domino’s provision of a telephone number for disabled customers may satisfy this obligation. Retailers that do not have an accessible website should therefore provide a toll-free number serviced by live customer service agents who can provide all the information and services available on the website.

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U.S. Supreme Court Rules NY Surcharge Law Regulates Speech

What the U.S. Supreme Court Did

The U.S. Supreme Court ruled last week that New York’s statutory ban on merchant’s surcharging customers who choose to pay with credit cards is a regulation of speech and is not merely a regulation of pricing conduct, as the lower court had ruled. New York’s statute, N. Y. Gen. Bus. Law Ann. §518, makes it a misdemeanor punishable by a fine or imprisonment for a merchant to “impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check or similar means.”  In Expressions Hair Design et al. v. Schneiderman, et al., the Court required the Second Circuit to consider the validity of the law under the First Amendment.  Specifically, the circuit court of appeals must now determine whether the New York law is a valid commercial speech regulation and whether the law can be upheld as a disclosure requirement.  Previously, the Second Circuit ruled that the law regulated conduct, not speech, since it required that the merchant’s prices should be the same whether a customer uses a credit card or cash.

Impact on Merchants and Payment Networks

In short, the status quo remains intact for now, in New York and in the eleven other states that regulate surcharges. The Supreme Court’s action does not immediately uphold or invalidate New York’s anti-surcharge law. Reviving the claim after it had been dismissed by the lower court, the law now must be reviewed again by the court of appeals (and potentially again after that by the Supreme Court) as to whether the law is a valid commercial regulation of speech. This review process could take a while, especially considering that one of the Supreme Court Justices recommended that the federal court of appeals ask New York’s top state court to give it an “accurate picture of how, exactly, the statute works.”

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Establishing a Sustainable Sales Culture

the-bank-accountWalt Moeling joined us on March 29th for the latest episode of The Bank Account with a lively discussion of bank sales tactics.  In this regulatory environment, banks need to balance growth goals with expectations for scrutiny of their sales tactics.  Regulators, investors, the press and consumers are all paying more attention to bank sales tactics.

While none of us hopes to be asked whether we “want fries with that?” as we conduct business with a bank teller, looking out for potential bank products that could benefit the bank’s customers presents an opportunity for both the bank and the customer to be better off.

You can also follow us on Twitter with Walt (kind of) at @MoelingW, Jonathan at @HightowerBanks, and me at @RobertKlingler.

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Georgia on my Mind: Changes in Banking Laws

the-bank-accountOn March 28, 2017, Jonathan and I sat down with Bryan Cave Colleagues Ken Achenbach and Crystal Homa in the latest episode of The Bank Account for a discussion focused on legislative changes in Georgia affecting banks, including modifications to Georgia’s business judgement rule and the Department of Banking & Finance’s Housekeeping Bill.

While the bills we discuss await the Governor’s signature (and subsequent effectiveness – July 1 for the business judgement rule change and 30 days after signature for the housekeeping bill), our team looks forward to the practical effect of these statutory changes.  As banking industry participants, we appreciate the efforts of the legislature to make Georgia an attractive state for banking.

As referenced in the podcast, we also encourage you to check out our prior The Bank Account episode about the role of bank directors post FDIC v. Loudermilk, and Crystal’s earlier post on providing banking services to minors.

You can also follow us on Twitter with Jonathan at @HightowerBanks, Crystal at @CrystalHoma and me at @RobertKlingler.  Ken cannot be followed on Twitter, as Ken’s thoughts cannot be limited to 140 characters.

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Dodd-Frank Act Reforms

Dodd-Frank Act Reforms

March 23, 2017

Authored by: Robert Klingler

Much of the discussion we’re having with our clients and other professionals relates to the prospects for financial regulatory reform.  To that end, and looking at it from the political rather than industry perspective, Bryan Cave’s Public Policy and Government Affairs Team has put together a brief client alert examining the political, legislative and regulatory issues currently under consideration.

In his first weeks in office, President Trump has taken steps to undo or alter major components of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). These include delaying implementation of the “Fiduciary Rule,” which regulates the relationship between investors and their financial advisors, directing the Treasury Secretary to review the Dodd-Frank Act in its entirety, and signing a resolution passed by Congress that repeals a Dodd-Frank regulation on disclosures of overseas activity by energy companies.

Read the rest of this alert on Bryan Cave’s homepage.

We’ve also posted about the impact of the proposed regulatory off-ramp on community banks, recorded a podcast episode on the Financial Choice Act, and discussed some of the causes, including hopes for regulatory relief, of the rise in bank stock prices in our podcast episode on the issues associated with elevated stock prices in bank mergers and acquisitions.

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