Senate Finance Committee Budget Hearing Texas Department of Banking Testimony of: Randall S. James – Commissioner September 13, 2004

Offered by: Texas Department of Banking September 13, 2004 Budget Hearing Page 2 Statutory Mandates  The Department of Banking is entrusted with insuring the safety of the public’s money held by institutions that provide financial services. We charter and/or license the following businesses:  Banks Chapter 31 of the Texas Finance Code requires the Banking Commissioner to examine each state bank annually or more often as the Banking Commissioner considers necessary to safeguard the interest of depositors, creditors, shareholders, participants and participant- transferees. Chapter 204 of the Texas Finance Code requires the Banking Commissioner to 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.  Offices of Foreign Bank Agencies Chapter 181 of the Texas Finance Code requires the Banking Commissioner to examine each state trust company annually or more often as the Banking Commissioner considers necessary to safeguard the interest of clients, creditors, shareholders, participants and participant-transferees.  Trust Companies

Offered by: Texas Department of Banking September 13, 2004 Budget Hearing Page 3 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.

Offered by: Texas Department of Banking September 13, 2004 Budget Hearing Page 4 Profile of Regulated Entities

Offered by: Texas Department of Banking September 13, 2004 Budget Hearing Page 5 Department Staffing by Strategy STRATEGY STAFFING LEVELS (1) Financial Examiners, Program Administrators and Related Directors Other Total Bank Examination Non-Bank Examination Application Processing 426 Administration 27 Regulatory Oversight 11 TOTALS TURNOVER Fiscal YTD 2004 (As of ) 9.8%23.2%13.3% Fiscal Year %14.9%10.5% Fiscal Year %20.0%14.6% Fiscal Year %20.0%21.0% (1) Represents actual staffing as of

Offered by: Texas Department of Banking September 13, 2004 Budget Hearing Page 6 Revenue Sources  The Department is fully self-funded and fully self-leveling. Fees and assessments on regulated entities fund 99.6% of the agency’s expenditures, with $58,000 in federal grants covering the remainder. Expenditure reductions will not benefit the state’s General Revenue Fund. By statute, the Department of Banking is limited to collecting fees and assessments that cover only the agency’s direct and indirect expenditures related to bank supervision (See Chapter of the Texas Finance Code).  The Department’s expenditures are mainly personnel related. Salaries and other personnel expenses average 80% of total expenditures. Travel related expenses, mainly to conduct examinations, are 9% of total expenditures. Primary Expenses

Summary of L.A.R. for FY 2006 and 2007 Texas Department of Banking Total Requested for Fiscal Year$11,200,124$10,731,988 Agency Funding at the 95% Target Level Exceptional Items Requested for Fiscal Years 2006 and 2007 Amount for Each FY Restore 5% Reduction$459,916 A portion of the 5% reduction eliminates nine examiner positions. The elimination of financial examiners will dramatically affect the agency’s ability to meet its statutory mandates and address new areas of concern. Continue the Regulator Response Contingency Rider $5,550,432 This rider is needed to provide a mechanism to request additional appropriations if certain events occur in the banking industry. It allows the agency to respond to a growth in banking assets, a shift in federal regulatory priorities, or a disparity in examiners’ pay compared to their federal counterparts. Increase the Bank Examination Staff by Seven $585,540 $568,040 Additional staffing is needed to address emerging areas of concern including Bank Secrecy Act compliance, corporate governance, and expanding information technology. Add one Consumer Assistance Employee $30,122 $28,775 One additional employee is needed to handle the increased number of consumer assistance calls and maintain the current level of service. Restore 5% Reduction$100,000 Data gathered from Finance Commission studies provides valuable information to the Legislature and other financial service industries about lending in Texas and historical trends. This study is eliminated in the 5% reduction. Fiscal Years Update Spending for fiscal years is expected to be within appropriated amounts. We are on target to achieve eight of nine key performance measures in FY 04. Also in FY 04, we received a waiver to exceed our out-of-state travel cap to perform examinations and attend core training.

Offered by: Texas Department of Banking September 13, 2004 Budget Hearing Page 8  The Finance Commission discussed and approved a resolution at its Board meeting on August 20, 2004, directing the Finance Commission Agencies to seek self-directed status, including removal from the appropriations process in the 2005 Legislative session. Delegated Authority for Financial Regulator Factors that influenced adoption of this resolution:  The Department of Banking is fully self-funding and fully self-leveling. The agency neither provides to, nor takes funds from the General Revenue Fund.  A delegated operational status allows greater flexibility to regulate the entire finance industry and to respond to changing economic conditions, which reduces the systemic risk within the industry and protects the public.  The Department of Banking remains accountable to the Finance Commission and Legislative Committee oversight and subject to audit by the State Auditors’ Office and Comptroller’s Office.  Removing statutory restrictions on administrative flexibility can save costs and improve efficiency and productivity.  Human resource functions can be more effectively and efficiently managed, which in turn helps the Department preserve human resources by controlling employee turnover and retaining experienced personnel.  Delegated authority in operationally administrative areas would include the Finance Commission building, employee levels, employee compensation, and out-of-state travel.