1. Governor’s Office of Budget, Planning and Policy and Legislative Budget Board Budget Hearing Texas Department of Banking Testimony of: Robert L. Bacon – Interim Commissioner September 2008

2. Department Overview Offered by: Texas Department of Banking September 2008 Budget Hearing 2  Established in 1905 by the 29th Legislature.  Rich tradition of professional and sound regulation.  Practices and promotes fiscal responsibility.  Reduces regulatory burden by coordinating regulatory activities with other state and federal agencies.  Our mission is to ensure Texas has a safe, sound and competitive financial services system.

3. Statutory Mandates Offered by: Texas Department of Banking September 2008 Budget Hearing 3 Banks, Trust Companies, Foreign Bank Agencies and Check Verification Companies:  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 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.  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.  Section 11.309 of the Texas Finance Code requires the Banking Commissioner to register check verification entities and operate a secure electronic system to facilitate notification of closed bank accounts subject to fraud.

4. Statutory Mandates … Continued Offered by: Texas Department of Banking September 2008 Budget Hearing 4 Prepaid Funeral Contract Sellers, Perpetual Care Cemeteries, Money Service Businesses 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 151 of the Texas Finance Code (Money Services Act) requires that the Banking Commissioner examine each money service business (currency exchange, transportation, transmission, stored value cards, and third party bill payers) annually 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.

5. Assets Under Supervision in Texas Offered by: Texas Department of Banking September 2008 Budget Hearing 5 Add pie graph

6. Profile of Regulated Entities Offered by: Texas Department of Banking September 2008 Budget Hearing 6 Information as of March 2008. * Does not include 18 out-of-state, state-chartered banks operating in Texas ($21,230 million) Regulated EntityNumber of Entities Total Assets $(billions) Commercial Banks*328$154 Foreign Bank Agencies8$ 53 Public Trust Companies21$ 29 Prepaid Funeral Licensees413$ 3 Perpetual Care Cemeteries242$ 0 Money Service Businesses131$ 74 Private Child Support Enforcement Agencies14N/A Check Verification Entities6N/A Totals1,156$312

7. Department Staffing by Strategy 7 Budget Hearing Offered by: Texas Department of Banking September 2008 STRATEGY STAFFING LEVELS [1] Financial Examiners, Program Administrators and Related Directors OtherTotal Bank Examination998107 Comerica Bank Examination8210 Non-Bank Examination15318 Application Processing527 Administration 24 Regulatory Oversight 11 TOTALS12740167 TURNOVER Fiscal Year 200810.9%22.5%13.8% Fiscal Year 20079.4%14.6%10.8% Fiscal Year 200614.0%19.0%15.1% Fiscal Year 200521.2%16.3%20.9% Fiscal Year 200412.0%22.5%14.4% Fiscal Year 20038.8%14.3%10.2% Fiscal Year 200212.0%22.5%14.1% Fiscal Year 200121.7%20.0%21.0% [1] Represents actual staffing as of 8/31/08.

8. Revenue Sources  The Department is fully self-funded and fully self-leveling. Fees and assessments on regulated entities fund 100% of the agency’s expenditures. 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. Primary Expenses  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, average 11% of total expenditures. 8 Budget Hearing Offered by: Texas Department of Banking September 2008

9. Summary of L.A.R. for FY 2010 and 2011 Texas Department of Banking 9 Budget Hearing Offered by: Texas Department of Banking September 2008 Revised RiderComments Contingency Appropriations – State Regulatory Response Amendments to rider: (1) Allow the agency the ability to seek examiner salary adjustments if salary levels are not competitive with the FDIC; (2) Make interim salary adjustments a component of future base appropriation requests; and (3) Assign a unique pay code to these type of salary adjustments.

10. Exceptional Items Requested for FY 2010 and 2011 Texas Department of Banking 10 Budget Hearing Offered by: Texas Department of Banking September 2008 Exceptional Items Amount for Each FY Comments Continue Funding of Interim Contingency Rider Appropriations $2,502,819 $2,545,119 Provides continued funding for the 2008 interim appropriations received for the oversight of Comerica Bank and examiner and related directors market salary adjustments. Without the continuation of the appropriations, the agency will be unable to adequately regulate Comerica Bank and examiners will likely leave if salary adjustments are taken back. 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. Career Path Promotions for Financial Examiners $282,231 $562,259 Provides funding for promotions in the financial examiner series. Career path promotions based on performance will enable the agency to demonstrate that state service can be a viable long term career thus curbing turnover. Commissioner Salary Increase$28,809 Provides a salary increase for the Commissioner to $165,000 annually to align the position’s salary to market competition.