House Appropriations Regulatory Subcommittee Budget Hearing Texas Department of Banking Testimony of: Randall S. James – Commissioner February 7, 2005

Offered by: Texas Department of Banking February 7, 2005 Budget Hearing Page 2  HB1 restores our full baseline funding.  HB1 increases key performance measure targets. Overview of HB1  While aggressive, we will strive to meet these new higher standards. However, we respectfully request reconsideration of one proposed new standard, which would increase the number of bank and foreign bank examinations performed to 150 for fiscal years 2006 and If the Department were to examine 100% of the banks and foreign bank agencies when due, we would not perform 150 examinations. The 150 examination number would exceed what is required under current statute and policy, therefore placing undue regulatory burden on supervised entities. We request that this performance measure be set at 133 for 2006 and 127 for  HB1 continues our regulatory response contingency rider, but the rider needs modification. This rider provides a mechanism to request additional appropriations and staff if certain events occur in the banking industry.  The agency needs to be able to respond quickly to changing conditions in the industry. Greater flexibility is needed to regulate the financial services industry and to respond to changing economic conditions. This reduces the systemic risk within the industry and protects the public.  The USA Patriot and Sarbanes-Oxley Acts introduced new requirements on financial institutions. In addition, money laundering, identity theft, breaches of consumer privacy, and cyber attacks pose significant risks to the financial services industry. All of these issues require the expenditure of additional resources by the agency but were not contemplated in the original language of the rider.

Offered by: Texas Department of Banking February 7, 2005 Budget Hearing Page 3 Overview of HB1 Contingency Appropriation: State Regulatory Response. It is the intent of the Legislature that the Department of Banking is self-funding and self-leveling, thereby receiving all necessary funding from supervised entities or federal grants and matching expenditures closely to the level of funding received. a) Contingent upon a finding of fact by the Finance Commission, and notice to the Legislative Budget Board and the Governor’s Office prior to any additional expenditures or increase in FTE cap, the Department of Banking is granted additional appropriations for increased expenditures in a fiscal year not to exceed % of that fiscal year’s beginning, appropriated budget. Additionally, the “Number of Full Time Equivalent Positions” (FTEs) may be increased by % of the FTE cap. b) Contingent upon a finding of fact by the Finance Commission, filed with the Governor and Legislative Budget Board, and neither the Governor nor the Legislative Budget Board issues a written disapproval within 30 days of the receipt of the finding of fact, the Department of Banking is granted additional appropriations for increased expenditures in a fiscal year of % or greater from the fiscal year’s beginning appropriated budget. Additionally, the FTEs may be increased by % or greater from the current FTE cap. c) The funds appropriated in item 3(a), and 3(b), are contingent upon the Department of Banking generating sufficient additional fee revenues to cover these expenditures and related employee benefits, and providing such information as may be deemed necessary by the Comptroller of Public Accounts to issue a finding of fact that the increased revenues will be available to fund the increased appropriations. d) It is the Legislature’s intent that an increase in staffing or expenditures must be related to the agency’s mission of ensuring appropriate levels of compliance within the system, performing the agency’s mandates under statute, or maintaining adequate quantity and quality of staff, including competitive salary levels.  We respectfully request that the regulatory response contingency rider be modified to read as follows:

Offered by: Texas Department of Banking February 7, 2005 Budget Hearing Page 4 Overview of HB1  Rider #6, Sharing of Receptionist, has been in place for the past several years. Consequently, the rider is no longer needed.  The current federal per diem rider allows the agency’s employees to be reimbursed at federal rates when joint examinations with federal banking regulators are performed. The federal rates for lodging, meals and mileage are respectively 3.7%, 19.3% and 15.7% higher than current state rates. This modified language would provide a mechanism for our financial examiners to be reimbursed at federal rates for all travel, creating more equitability between state and federal bank examiner compensation. Proposed language: Federal Per Diem Authorized: Employees of the Texas Department of Banking in travel status related to fulfilling the agency’s regulatory responsibilities may be authorized reimbursement for travel expenses, including mileage, at a rate equal to that paid by federal counterpart agencies.

Offered by: Texas Department of Banking February 7, 2005 Budget Hearing Page 5  Three new riders to HB1 are requested. Enhancement Requests to HB1  Surplus Revenue Collections: As a self-funding, self-leveling agency, any surplus revenues collected by the Texas Department of Banking for the biennium ending August 31, 2007 will be placed in a designated fund account to be used to satisfy the revenue collection requirements of the Texas Department of Banking for the biennium ending August 31,  Travel Limitation Exemption: Notwithstanding any other provisions of this act regarding travel limitations or caps, the Texas Department of Banking may expend funds appropriated as necessary for travel related to fulfilling the agency’s regulatory responsibilities.  Facilities Management: The Texas Department of Banking is hereby granted authority to manage its occupied or owned facilities as long as the agency generates sufficient revenue to cover all costs.  This rider provides the capacity to perform statutorily required examinations at entity offices in other states. It also enables financial examiners to attend core training classes offered only by the FDIC, Federal Reserve and Conference of State Bank Supervisors at training facilities outside of the state.  This rider provides a mechanism for the agency to even out its revenue stream from one biennium to the next.  This rider allows the agency to continue to manage and occupy its facilities at no cost to any other state agency.

Offered by: Texas Department of Banking February 7, 2005 Budget Hearing Page 6  The Department’s 5% reduction was comprised of: Explanation of 5% Reduction  $459,916 each year which eliminated nine of the ten financial examiner positions granted in October 2002 under a contingency rider request. This reduction would have resulted in approximately 14 fewer bank examinations and 16 fewer trust and other specialty examinations to be performed each year of the biennium.  $100,000 each year which eliminated appropriations for the Finance Commission study required by Sections (e) and (c) of the Texas Finance Code.

Offered by: Texas Department of Banking February 7, 2005 Budget Hearing Page 7  Exceptional item requests related to an increase in the examination staff and an increase in consumer assistance personnel are important and needed. This will allow the agency to maintain an adequate level of supervision to meet regulatory responsibilities and performance measures. Explanation of Exceptional Items  Seven additional financial examiner positions are necessary to:  Assess compliance with the Bank Secrecy Act and USA Patriot Act, which is critical to detecting and preventing terrorist and money laundering activities.  Analyze the risks from capital markets, information technology systems, bank fraud, and bank holding companies and affiliate issues to ensure the safety and soundness of entities under our supervision.  Perform additional evaluations of external audits, internal controls, conflicts of interest and financial reporting to determine the adequacy of corporate governance practices.  Due to increased awareness of our agency’s services, more consumers are contacting the Department looking for help in resolving problems. An additional consumer assistance specialist is needed to ensure that consumers receive timely and accurate responses to inquiries and complaints.  The Department is fully self-funding and fully self-leveling. The agency neither provides to, nor takes funds from the General Revenue Fund.

Offered by: Texas Department of Banking February 7, 2005 Budget Hearing Page 8 Supervisory Information The total number of state-chartered banking organizations has declined. Most of this reduction is the result of merger activity. As a result, the surviving banks are substantially larger in size and operate many more branch locations. As the size of the organization increases, so does the complexity of its operations. Larger banks engage in more sophisticated investment ventures and provide a greater variety of products and services to their customers. Even though the number of banking organizations has decreased, the assets and branches have increased, and agency resources needed to appropriately supervise these businesses have not diminished at a commensurate rate. Larger and more complex banks also necessitate a better trained and experienced staff of examiners to review their operations. BANK INFORMATION Percent Increase / (Decrease) Number of Texas State-Chartered Banks [1] (43%) Number of Branches of Texas State- Chartered Banks 4671,158148% Total Assets of Texas State-Chartered Banks $45 billion$68 billion51% Average Assets Per Bank $78 million$205 million163% STAFFING INFORMATION Percent Increase / (Decrease) Total Agency Staffing Level (29%) Number of Financial Examiners [2] 14090(36%) [1] Does not include out-of-state chartered banks operating in Texas. [2] Includes Bank and Trust field examiners and related directors.

Offered by: Texas Department of Banking February 7, 2005 Budget Hearing Page 9 Consumer Assistance Information At the suggestion of the Sunset Advisory Commission, legislation was approved that requires our supervised entities to provide their customers with information about how to contact the Department in the event of a problem. Consumers are contacting the agency looking for help in resolving problems with institutions or seeking answers to financial questions. The need has outstripped the available resources, and additional staffing is needed. Staff assisted approximately 2,500 callers on problems with financial service providers not supervised by the Department.

Offered by: Texas Department of Banking February 7, 2005 Budget Hearing Page 10 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 interests 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 interests of clients, creditors, shareholders, participants and participant-transferees.  Trust Companies

Offered by: Texas Department of Banking February 7, 2005 Budget Hearing Page 11 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 February 7, 2005 Budget Hearing Page 12 Profile of Regulated Entities Information as of September 30, * Includes (13) out-of-state state chartered banks operating in Texas with $13.5 billion in total assets. Regulated Entity Number of Entities Total Assets $(millions) Commercial Banks*344 $81,285 Foreign Bank Agencies8 21,585 Public Trust Companies24 19,975 Prepaid Funeral Licensees419 2,566 Perpetual Care Cemeteries Sale of Check Licensees67 61,539 Currency Exchange and Transmission73 40 Private Child Support Agencies14 N/A Totals1,188 $187,166

Offered by: Texas Department of Banking February 7, 2005 Budget Hearing Page 13 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 26 Regulatory Oversight 11 TOTALS TURNOVER Fiscal Year %22.5%14.2% Fiscal Year %14.9%10.5% Fiscal Year %20.0%14.6% Fiscal Year %20.0%21.0% [1] Represents actual staffing as of