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FEDERAL DEPOSIT INSURANCE CORPORATION

+ + + + +

MEETING OF THE ADVISORY COMMITTEE

OF STATE REGULATORS

+ + + + +

OPEN TO PUBLIC OBSERVATION

+ + + + +

WEDNESDAY,

OCTOBER 18, 2023

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The Advisory Committee convened at 1:00

p.m. EDT, Martin J. Gruenberg, Chairman,

presiding.

PRESENT:

MARTIN J. GRUENBERG, Chairman

TRAVIS HILL, Vice Chairman

JONATHAN McKERNAN, Director, Federal 

Deposit Insurance Corporation

KEVIN ALLARD, Superintendent, Division of 

 Financial Institutions, Ohio

CHARLES COOPER, Commissioner, 

Department of Banking, Texas

JAMES COOPER, President & CEO, CSBS,

Washington, D.C.

MARY GALLAGHER, Commissioner of Banks,

Division of Banks, Massachusetts

GREG GONZALES, Commissioner, Department of 

 Financial Institutions, Tennessee
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KEVIN HAGLER, Commissioner, Department of 

Banking and Finance, Georgia

MELANIE HALL, Commissioner, Division of 

Banking and Financial Institutions, 

Montana

DAWN HOLSTEIN, Commissioner, Division of

Financial Institutions, West 

Virginia

LISA KRUSE, Commissioner, Department of

Financial Institutions, North Dakota

ANTONIO SALAZAR, Commissioner of Financial 

Regulation, Maryland

MICK THOMPSON, Banking Commissioner,

Banking Department, Oklahoma
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C-O-N-T-E-N-T-S

Introductory Remarks

Martin Gruenberg............................. 4

Travis Hill.................................. 6

Economic and Banking Conditions Discussion

Doreen Eberley............................... 6

Krishna Patel................................ 8

Camille Schmidt............................. 15

2022 Financial Institution Diversity SelfAssessments

Nikita Pearson.............................. 49

State Federal Coordination

Doreen Eberley.............................. 66

Suzanne Clair............................... 67

Thomas Lyons................................ 76

Luke Brown.................................. 81

G. Chris Finnegan........................... 97

Closing Remarks

Martin Gruenberg........................... 118
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P-R-O-C-E-E-D-I-N-G-S

1:02 p.m.

CHAIRMAN GRUENBERG: Well, good 

afternoon, everybody, and I'd like to welcome you 

to this meeting of the FDIC's Advisory Committee 

on State Regulators. We really value the 

opportunity to interact with you and particularly 

today to take advantage of the opportunity to get 

your feedback on what you're seeing in your 

states and through your institutions.

I think we've been struck as it’s been 

indicated by the quarterly banking profiles that 

the banking industry in the United States 

generally and community banks specifically have 

proven to be quite resilient during, I think fair 

to say, very uncertain economic times. And the 

industry remains well capitalized. Credit 

quality as a general matter has remained quite 

good. Liquidity has stabilized after the events 

of earlier this year, and loan balances for the 

industry as a whole and community banks have 
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continued to grow. So that's the good news.

The other side of the story is, I 

think, we have a very uncertain economic 

environment with significant downside risk to the 

industry going forward. We have a high interest 

rate environment, which will be challenging for 

our institutions to manage in a variety of ways;

uncertainty as to where the economy is headed;

and as we're all aware, significant underlying 

vulnerabilities for the industry including 

unrealized losses on securities and loans, 

significant concentrations of uninsured 

deposits, and significant commercial real estate 

exposures, particularly relevant to banks under 

100 billion and to our community banks, in 

particular.

So, while the industry remains in 

reasonably good shape, the uncertainty and the 

downside risks, I think, will probably keep us 

all occupied for the foreseeable future.

So, before I turn it over to Doreen 
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and our panel discussion to elicit your thoughts 

on these and other issues, maybe I'll ask our 

Vice Chairman Travis Hill if he would like to say 

a word.

VICE CHAIR HILL: Sure. I just want 

to say thank you to everyone for being here today. 

I think the FDIC's coordination with the state 

regulators is a critically important part of our 

supervision, and so look forward to the 

discussion today. Thanks.

CHAIRMAN GRUENBERG: Thank you. And 

we're also joined by our other Director Jonathan 

McKernan. 

Thank you, Jonathan.

Doreen, it's all yours.

MS. EBERLEY: Okay. Well, since we do 

have several members of our Board of Directors in 

attendance today, I have some brief housekeeping 

remarks. 

The Government in the Sunshine Act 

imposes notice and access requirements whenever 
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a quorum of the FDIC's Board of Directors meets 

to conduct or determine agency business. This 

meeting is not held for such purposes and does 

not constitute a meeting under the Act. The board 

members present will only engage in general or 

preliminary discussions that do not relate to 

specific proposals for action pending before the 

FDIC. Any specific issues for official board 

resolution will remain open for full 

consideration by the board following the 

conclusion of this meeting. And if you have any 

questions, we have some lawyers here to answer 

them.

Okay. And let me welcome- we have a 

couple of members that are participating 

virtually: Greg Gonzales and Dawn Holstein. 

Also- welcome.

And we will go ahead and jump right 

into it. We're going to begin our afternoon with 

Camille Schmidt, Chief of the Risk Insights and 

Analytics Section in the Division of Risk 
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Management Supervision; and Krishna Patel, Chief 

of the Economic Analysis Section in the Division 

of Insurance and Research. And Camille and 

Krishna are going to provide a brief economic 

overview and touch on industry risks. And during 

the session, we really do want to hear from you, 

so we're going to try to do some Q&A to get some 

conversation going and hear your thoughts on 

these risks, as well as others, and we look 

forward to hearing from you about what's going on 

in your states. 

And I also want to acknowledge that 

Commissioner Hall, Melanie Hall, is also on the 

line virtually.

So, Camille and Krishna, I will kick 

it over to you.

MS. PATEL: Thanks, Doreen. 

So, I guess if we could,-- should have 

a copy of your presentation in your folders. We 

also have it up on the screen.

So, the discussion today will be 
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oriented around two important issues in the 

banking industry, and that is funding and 

interest rate risk and credit risk. I'll start 

off the conversation with a brief economic 

overview and some highlights of some of these 

risks, and then we'll, sort of, have a question 

and answer session.

So, on the next slide we have a map 

here of economic conditions in different states. 

Overall, the economy this year has been 

relatively resilient despite recession fears,

sort of, earlier this year. We expected to have 

a recession this year, but strength in the labor 

market, strength in business spending and 

consumer spending have held up economic 

activities so far.

Still the economy faces challenges, 

ongoing challenges, from high inflation; although 

inflation has come down, it's still historically 

high, and historically high interest rates. I 

think the key thing here as shown on this map is 
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that economic conditions vary by state. You have 

some states noted-- denoted here in the darker 

blue shading is-- it has been stronger, 

relatively stronger than some of the other 

states. Lighter blue is-- that's the weakest 

growth. All states grew, but some states are 

about near zero.

The outlook for the economy, as the 

Chairman mentioned, is uncertain. We've got some 

geopolitical risks that have moved interest rates 

a bit and may cause some questions about a global 

economic slowdown, the continued effects of 

higher inflation, as well as the continued 

effects of higher interest rates that slowed many 

interest rate sensitive markets such as 

residential real estate, commercial real estate. 

We'll talk a little bit more about that later. 

So, it's an uncertain outlook. Still the 

recession forecasts call for a slowdown in the 

economy, not quite an outright recession, 

although some-- the recession risks still remain 
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elevated. 

With regard to interest rates, in the 

next slide, the left-hand chart shows the 

degree-- how sharply interest rates rose during 

the current cycle and how high they remain. The 

Federal Reserve recently slowed the pace of 

interest rate hikes, paused in the last meeting, 

but expectations are for at least one more rate 

hike before it holds steady and maybe potentially 

decline next year, although I raise a question on 

potential because, you know, it really all 

depends on the inflation picture and the labor 

market picture. The labor market still remains 

pretty strong with historically low unemployment 

rates. And inflation, although it has come down,

there have been key components in there that 

remain pretty high including shelter prices, food 

prices. Recently energy prices have also gone 

up. Also, geopolitical factors may play a role 

in price levels overall.

And the long end, the longer-term 
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yields have also increased recently for a number 

of factors including Treasury supply, Treasury 

issuance, global demand for Treasuries, also kind 

of risk appetite among key investors. So, we've 

got interest rates higher all along the yield 

curve, but the longer rates been slower to rise 

compared to shorter-term rates. So, we still 

have that inversion that's causing potentially 

challenges to the banks. 

And so that brings me to the next 

slide which shows net interest margins, which I'm 

sure you're all looking very closely at for the 

banks that you supervise. Here we have a chart 

that shows net interest margins over the past 15 

years that provides a historic context and net 

interest margins for banks of different size 

groups. 

The thing that stands out in this 

chart is, first of all, that net interest margins 

rose very sharply after declining in previous 

years. It rose very sharply when interest rates 
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started to rise and banks started to benefit from 

higher asset yields. But then we recently saw a 

turn in NIMs, so we've seen the net interest 

margins starting to decline, reflecting higher 

funding costs. Among all these banks, community 

banks tended to report higher net interest 

margins, but they also have a declining NIM as 

funding costs have increased.

So, in the next slide we go into a 

little bit more about liquidity and funding. So 

here we have measures for liquidity and funding 

compared to total assets. We see these big shifts 

here in recent years. So, we've got the pandemic 

years where you see this big rise in liquidity. 

We've got a surge in deposits, lots of cash. And 

then all of a sudden, that's all reversed in the 

past year or two. And then on the flip side of 

that,-- well, related to that I would say is the 

trends in funding. Non-deposit funding has 

increased.

So, in the next slide we can get into 
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that a little bit more. So, we see these large 

swings in deposits, mostly after a big surge 

during the pandemic years. Deposit flows have 

declined-- deposits have declined in the banking 

industry. Many of this reflects consumers 

searching for higher yields. Within the banking 

industry, there's been a shift towards 

interest-bearing deposits, CDs, money market 

deposits as well as other time deposits, and 

also, we've seen this outflow to the money market 

funds which offer higher yields compared to bank 

deposits.

Although banks have increased deposit 

rates, they do remain below market rates, and 

this has also challenged the banking industry as 

they've had to raise rates, had to also look for 

other sources of liquidity, turning to nondeposit liabilities, turning to brokered deposits 

and other sources of funding such as Federal Home 

Loan Bank funding.

So that sort of wraps up the, sort of,
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liquidity and funding conditions. I'll turn it 

over to Camille now for a discussion of credit.

MS. SCHMIDT: Thanks, Krishna. 

So, like she said, I'm going to shift 

the discussion to some bank lending and potential 

credit risk areas. And I'd like to start with 

commercial real estate.

The dollar volume of bank-held CRE 

loans is at an historic high; it's over $3 

trillion, and with that a growing number of banks 

hold CRE loan concentrations. So, as you can see 

on this chart over-- around 1,400 banks had a 

concentration of total CRE loans greater than 300 

percent of capital and reserves, or of 

construction and development loans over 100 

percent of capital and reserves as of second 

quarter. 

And on this chart, if you look at the 

blue bars; and this shows exactly what the 

Chairman was talking about earlier, you can see 

that the vast majority of them are institutions 
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with under $10 billion in assets. That's the 

blue portion of the bar. So those are the banks 

that you we generally consider community banks.

And not on this chart, but there are several 

hundred of those that have concentrations over 

400 or 500 percent.

And as we've been saying, -you've all 

heard about what's going on in the CRE market, so 

I'm not going to talk about that much, but you 

know that these structural changes post-pandemic 

have really affected the office market. And so,

office loans coming due in the near term in the 

next year or two are really going to face an 

uphill battle refinancing. Those borrowers are 

facing rising interest rates, reduced cash flows 

from low,-- or from higher vacancy rates, lower 

property values, and tightening credit 

conditions.

I'd also like to talk about consumer 

lending because both bank and non-bank consumer 

lending has been growing consistently since 
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second quarter of 2020. And in recent quarters,

credit card balances and other consumer loan 

balances have grown at a very fast clip, rising 

16 percent and over 12 percent, respectively, in 

just the past year. 

So, the delinquency rates on these 

institutions with material exposures to credit 

card lending or auto or other consumer loans 

is-- still remains manageable, but those ratios 

are increasing. And I just mentioned this 

because I think discretionary spending is often 

the first to be cut when budgets come under 

pressure. And the consumers have held up the 

economies for a few years, but we are seeing some 

strength in leisure spending starting to level 

off. And it's really uncertain how consumer 

spending will shape up in the coming months as 

several economists are expecting it to moderate.

So American consumers face some 

obstacles such as student loan repayments 

starting back up, a growing debt service. Those 
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debt-to-income ratios are higher. They've got 

shrinking savings accounts and many banks are 

tightening their lending standards on top of 

that.

Then, finally, I will just mention 

residential lending because that market continues 

to deal with high interest rates driving a low 

housing supply and reduced affordability, and 

nationally home price appreciation continues. It 

slowed, but as I checked this morning, it seems 

to be kind of picking up again. 

So, I'm interested to hear about how 

the banks you supervise are dealing with all of 

these issues and where you as regulators are 

potentially challenging-- or changing some of 

your supervisory efforts and programs. Same way 

for interest rate risk and funding. It's all on 

the board. So, if any of you would like to start 

telling us about what maybe you're seeing or what 

the things we've talked about might trigger.

MR. HAGLER: Hi. I'll chime in.
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MS. SCHMIDT: Okay. Thanks, Kevin.

MR. HAGLER: Kevin Hagler from 

Georgia. You probably saw me flinch when you 

were talking about the CRE concentrations. That 

was on purpose, yes. So, we're looking through 

that. And again, in a world where it's an 

average, so there's somebody driving up the

average. And then we've got some outliers within 

our own average. It's definitely an area that 

I'm concerned about.

Of course we examine for it. My 

portfolio is your portfolio. We're almost all, 

except for two banks, are FDIC banks. So, the 

measuring, the monitoring, the diversification of 

the-- all those pieces are so much better than 

they were before. But I still don't take much 

comfort in that knowing the impact of it, so an 

area that we're going to continue to watch.

We all worry about the office. I'm 

just not sure that I see a lot of that in our 

portfolio. I'm not sure exactly who does the 
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lending for the office, but I don't think it's 

the community banks. But it may be-- they may be 

lending to entities that benefit from those 

offices being filled, so I don't think we can get 

away with it too easily. 

But as far as the rising interest 

rates, the biggest feedback I've received from 

the bankers I talk to is just that the shocks 

have been so great that their,-- and I don't-- I'm 

not quoting them, but their models are unreliable 

at this point. They probably wouldn't admit that 

officially, but yes, I think that's the true 

sentiment. 

They're all supposed to be asset

sensitive. So, as you saw, the net interest 

margins were growing as rates went up, but at 

some point, I think the rates got so high that 

they could not-- either borrowers couldn't afford 

to borrow at that rate or are just choosing not 

to. So, then they lost that momentum on the top 

end. 
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And as you pointed out, the deposit 

rates are catching them on the bottom. So, it 

wouldn't normally be like that in a slow rising 

rate. I think that's what they are running into, 

but it does worry me that their modeling can't 

seem to handle that. So, if they're going to try 

to take any action based on that in terms of 

hedging or swaps or anything like that, I don't 

think they've got a good data set to do that 

reliably. But that's just the general feel from 

what I'm seeing.

MS. SCHMIDT: Thank you. I will 

comment to your comment about office space. We 

have soft data from our examiners that are at 

community banks telling us that there is more 

exposure at these banks to multifamily and 

retail. And we see that whether-- when we cut it 

by different total asset size groups or our 

regions, all of them, are still again soft, more 

kind of survey-like data, showing more exposure 

to multifamily and retail. Office maybe coming 
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in third over-- compared to other things. So 

please let me know if you're seeing otherwise. 

MR. HAGLER: Sounds good.

MS. SCHMIDT: That would be helpful.

Does someone else want to comment over 

here? We've got plenty of time, so you'll all 

get to speak.

MR. C. COOPER: I'll mention

and-- chime in. Charles Cooper of Texas. Agree 

with everything Kevin said. I think on the soft 

data you're talking about, that's where we need 

to focus as much as we can to try to develop that. 

In Texas where the economy is still -is strong I 

do believe that because of everything that's 

happened historically our bankers have a better 

grasp of the issues that they need to deal with 

and have more data from their customers than 

they've ever had before. So, I think that's a 

very-- it's a positive. I do believe that there 

will be some soft spots possibly in certain 

markets and in certain geographical areas.
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About the rising rate environment, as 

of June 30, the NIM in our banks has improved, 

but I do think a lot of them are asset- sensitive. 

I think the 9/30 data that we're beginning to get 

in may show a little bit different trend there. 

And since you say what other risks 

concern you, stuff that they ask us, what keeps 

you up at night, I have to say, Mr. Chairman, 

that I'm always concerned about cyber risk. I 

think the ransomware is proliferating. The 

exposure the banks have to third-party service 

providers is increasing, and I just think we have 

to maintain our vigilance and focus in that 

regard.

MS. SCHMIDT: Very good. And I think 

we'll hear about third-party this afternoon.

Oh, Tony?

MR. SALAZAR: Tony Salazar, State of 

Maryland. And I would echo Charles' comment 

about the cyber, from our office's perspective, 

what we're worried about. We did have one bank 
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that had an episode with that. And fortunately 

it was a small bank, but it proved up how 

devastating that can be. Particularly if it were 

a larger institution, it would be a big problem.

In terms of the institutions, one of 

the things that we're hearing is a lot of concern 

over the uncertainties both on the lending-- on 

the customer side and on the bank side. So,

uncertainties over how long and where rates are 

going to go, just regulatory uncertainty. And a 

lot of that's leading to loan growth, at least in 

the Maryland. I think you probably know around 

this area it's just still there. It's just not 

going at the rates they had been used to before, 

maybe matching the economy, which is kind of in 

Maryland, moving along, but not-- gangbusters. 

So, they're matching that.

But we have not seen issues with 

liquidity in our institutions. That's all pretty 

stable. They're managing the net interest margin 

pretty well. And loans, they seem to be 
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diversified, at least on the CRA, not CRA, CRE 

front and things like that. So, we're concerned 

about what we don't know more than anything else. 

And like I said, I think that uncertainty has a 

lot of people hesitant to maybe make any big bets.

MS. SCHMIDT: Are any of you seeing 

any changes in lending standards? Tightening 

rather than-- presuming not-- maybe not much 

loosening. Again our soft data, the Senior Loan 

Officer Survey talked about tightening lending, 

but our soft data, what our examiners are telling 

is they're not really seeing that, that most 

bankers are telling them they've kind of stayed 

the same. A few have tightened, but not a lot. 

So, if any of you have comments on 

that or appraisals that you've seen, recent 

appraisals?

MS. EBERLEY: So, we do have --

MS. SCHMIDT: Oh.

MS. EBERLEY: Sorry. We have a 

comment. Greg Gonzales has his hand up in Webex. 
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If we can get him. - Good. 

MR. GONZALES: Thank you. 

MS. EBERLEY: Sure.

MR. GONZALES: I agree with everything 

that's been said. I was just going to say on the 

CRE, certainly concentrations increased. Really,

we're just trying to take it on a bank-by-bank 

basis. We learned so much during the Great 

Recession with respect to a number of 

institutions having significant concentrations, 

but being able to manage through them well. And 

we think that's going to be the case again. We 

also saw some institutions that were well below 

those thresholds and had some challenges. So,

it's just really a question of bank by bank and 

what type of economic environment for that 

community and experience in staffing.

I'd also say that on the other risk or 

concerns I'd be interested in hearing from the 

FDIC with respect to the-- sort of a follow-up on 

Charles Cooper's comment on cybersecurity. I'd 
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be interested in hearing the attitude with 

respect to adoption of technology, emerging 

technologies. We had a few comments from 

institutions that are interested in looking at 

some things but just curious as to the 

regulators' attitude towards that. We think that 

it's important for community banks to have the 

ability to explore and maybe adopt certain 

technologies, but we'd love to hear any 

conversation along that line.

MS. EBERLEY: Sure, Greg. Thank you. 

I'm not sure exactly what kind of technology 

you're speaking about, but I'm going to make a 

presumption to start and you can hop back in and 

correct me if I'm wrong.

But my guess is that you're talking 

about technologies that can partner with a bank's 

core provider to help it with cybersecurity 

defenses. Am I on the right track?

MR. GONZALES: That, and really just 

looking for general attitude and as to what do we 
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tell institutions should they have an interest?

One of the things that I've heard is 

institutions want to be relevant, want to able to 

compete, and, to a degree, they need to be able 

to explore emerging technologies. So, I don't 

have one technology to point to, but just a 

general comment would be helpful. Thank you.

MS. EBERLEY: Okay. So, it sounds 

like you're speaking more about partnering with 

third parties to provide products and services to 

the customer base, and that's absolutely 

something that we're supportive of. It helps 

community banks to be able to provide products 

and services and compete with larger institutions 

that may be able to do that directly.

I think there's-- we've heard from 

community banks that there are challenges in 

getting their cores, to the extent that those 

products and services or the technology needs to 

connect through the core, there are challenges. 

And the cores have told us that those challenges 
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relate to their need to prevent ransomware 

attacks on the core and making sure that the core 

remains safe and sound. But that's something 

that we're absolutely happy to facilitate the 

conversations and keep those conversations moving 

forward.

The broader question I think will fall 

under a later agenda item when we talk about 

third-party risk management and really the banks' 

responsibilities when they're partnering with a 

third party and what they need to do. So, if I 

can defer that until that conversation, I'd like 

to do that, if that's okay.

MR. GONZALES: That would be great. 

And I have a follow up before we get to the thirdparty risk management guides. I have a follow up 

on that point, too, so thank you.

MS. EBERLEY: Okay. Terrific. 

Thanks.

MR. HAGLER: I would say in a bit of 

irony that we had a financial institution this 
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year that had a breach, a cyber event, and, but 

it was through the telephone banking system, so 

very old tech is where the breach came through. 

And then the real issue that's getting to be super 

expensive is one that you all read about, too, is 

the washing of the checks. In fact, I had 

somebody come through my neighborhood the other 

day and clean out everybody's mailbox looking for 

checks. So, yes. So, and I appreciate the focus 

on new and improved technology, but it seems to 

be the old school stuff that's been expensive 

this year in Georgia.

MR. J. COOPER: And, Doreen, and I 

mentioned that earlier that more concern about 

check fraud and being connected by effectively 

organized crime and that it's not a one-off kind 

of situation. So clearly hearing that from other 

states.

And I think from the association of 

state bank regulators' perspective, we've been on 

a listening tour for the last few months with our 
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district meetings and we convene our five 

districts. And I think one observation I'd make 

is that particularly with commercial real estate,

it's a very large and diverse marketplace. And 

I think the state regulators largely have a good 

handle on what's going on in their banks, and the 

more coordination, collaboration, communication 

that we have with our federal regulatory 

counterparts I think we get to better 

conclusions. 

And in particular, it's clear that the 

large urban areas are under more stress, 

particularly in office space. In many 

communities, there's a lack of affordable 

housing, and I think concern about constricting 

credit for commercial real estate and building 

new homes. So, I think there's some risk from 

the regulatory response perspective that we 

actually limit investment. So, I think it's not 

showing up in terms of performance at this point. 

There seems to be more equity in deals than in 
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past, kind of, times of economic uncertainty. 

So, I think right now from what I hear more, still 

relatively confident in asset quality.

On the funding side, it's interesting 

because I look at the charts, and I tend to index 

on 2019 as, kind of, prepandemic. And it seems 

like at that time, 2019, liquidity and funding 

was a bigger concern. We went through this, kind 

of, economic, months of fiscal stimulus, lots of 

monetary stimulus. And now it seems to be 

normalizing a bit. So, I think it's an 

interesting kind of exercise to compare back to 

2019. Where are we on the funding side? But 

clearly banks are being disintermediated, 

particularly on the larger deposits, and move 

into more, higher-yielding instruments.

So, I think just kind of final 

observation, we've been running a Community Bank

Sentiment Index since 2019, and last quarter, 

quarter 2, was the absolute lowest that it has 

ever been. And it did tick up in the third 
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quarter slightly, so there's a bit more optimism 

from the community bankers that we surveyed, but 

I would still say that it's not a very optimistic 

view. 

So, it gives us some perspective into 

how they are feeling, and particularly, I think 

they're concerned about monetary policy and what 

that does to their ability to attract and retain 

deposits. They're concerned about regulatory 

reaction to the events of March. Cybersecurity 

continues to be a major risk.

MS. KRUSE: Is it my turn? 

(Laughter.)

MS. KRUSE: I'm Lisa Kruse from North 

Dakota, and I just wanted-- I totally agree with 

everything that has already been said. I think 

cybersecurity is definitely top-of-mind for all 

of us, especially due to the global environment 

right now. 

But specifically to your questions, I 

agree with what has been said. As far as us 
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changing any exam procedures, I don't really see 

that. I think they have a good framework in 

place. We are focusing on liquidity. Maybe 

pushing a little bit harder, making sure that 

banks have actually tested their lines and their 

borrowing lines. 

And also, I think what I appreciate, 

too, is, and I think FDIC and us have since the 

crisis-- when you look at the Call Report and you 

get the commercial real estate percentage, we are 

making our examiners look a little closer. Is it 

diversified? Is it all hotels? Is it all office? 

I mean, it really makes a difference how we treat 

that. And if it is diversified. And what we're 

seeing that-- and then I think it's helpful and 

makes it a little more common sense than grouping 

all commercial real estate as the same because 

the risk is not.

MS. EBERLEY: Very true.

MS. KRUSE: Like offices is obviously 

what we're more concerned about at this point. 
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And I'm fairly insulated. We have a lot of 

agriculture in our area, but it's the same there. 

Any concentration we really need to look deeper 

to see what makes that up.

I just wanted to address something a 

little bit more global, or for the whole 

financial industry. So, that also affects the 

banking industry, and that is like the non-bank 

arena. And I think it's very important to talk 

about right now. And I wanted to point to 

Chairman Gruenberg. 

At the Exchequer Club you made some 

comments about that, especially when it comes to 

mortgage lending. And we share your concerns 

obviously. Since the financial crisis, mortgage 

lending has moved from banks to nonbanks. 

Seventy percent is now the nonbanks, and seven of 

the ten largest mortgage lenders are nonbanks. 

And that's where state regulators-- we kind of 

come into play because we license the nonbanks, 

the mortgage lenders, and the mortgage servicers, 
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and we also then see how it impacts our banking 

system. 

So I just wanted to highlight a little 

bit about how we are addressing that on a state 

regulatory basis because of the incredible impact 

it has on the financial system. We took it upon 

ourselves. We need to address it. And like me 

as North Dakota, a small state, I've seen 

explosion in the nonbank licenses. And 

one thing that we've done is to work together as 

a state system to come up with credential 

standards, especially for mortgage servicers. 

And it covers capital, liquidity, and also 

corporate governance requirements. And I think 

that's very important to be aware of, that we 

have that already developed. And with the states 

that so far have implemented these credential 

standards, we cover 98 percent of the mortgage 

servicing market.

And also, since we are collecting data 

on these entities, and I know it has an impact on 
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the financial system, we are more than willing to 

share data points or anything we see in this 

market. And we would love to have that dialogue. 

If there's anything that you feel would help you 

as our partner and-- as our partner, in 

overseeing the financial system, we definitely 

have that data and we would love to-- if there's 

anything specific that you would like to see or 

we can do better in our partnership in sharing, 

we are,-- I think we're all in this together, and 

we want to make sure our financial system is 

protected.

MS. SCHMIDT: Thank you for that 

offer, because we are always looking for more 

information on that non-bank sector.

Others? Kevin?

MR. ALLARD: Just as far as the 

interest rate increases, the pace at which that 

happened in unprecedented. The fact that they 

could be sustained for some period of time, I 

don't think we've seen that fully play out in 
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terms of banks and margin compression and/or 

liquidity and funding risk.

Switching to credit risk, I think we 

all know there's a significant volume of leases 

that are resetting, loan terms that are going to 

reset, new cap rates are going to be utilized. 

As far as Ohio banks, talking specifically about 

office space, I don't know that that's prevalent 

on Ohio bank balance sheets, but I do wonder what 

the spillover effect may be when those market 

forces come to bear. 

The other comment, kind of going along 

with what Charles said, I think we all worked 

with our banks during the last crisis to talk 

about the importance of concentration risk 

management. I think they got that lesson very 

well. So, my hope is that banks are better 

prepared to deal with this cycle. 

MS. GALLAGHER: I'm Mary Gallagher 

from Massachusetts. I agree with everything 

that's already been said, so I'm not going to 
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rehash, but towards the end of your comments, 

Camille, I appreciate the macro-economic 

environment mentioned student loans. That's 

actually another area that the states-- we're at 

the table as, at least in Massachusetts and many 

other states, licensing student loan servicers. 

And there is a pain point with the return to 

payment. You have three-and-a-half years of 

deferred,-- a huge amount of money-- deferred 

payment. And I worry about the consumer having 

to have a monthly payment when everything else is 

so expensive.

MS. SCHMIDT: Right.

MS. GALLAGHER: So, this is an area at 

a macro level that I think there could be pain to 

come. 

Lisa, you're right, it's,-- we're 

talking about banks. This is-- that's what we 

do. It's a big part of what we do, but we also 

have these other areas and the overall financial 

industry and where the consumer will be is a big 
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concern.

MS. SCHMIDT: That's a good point.

So, has everyone had their 

opportunity? I think we might have a --

MR. THOMPSON: This is Mick Thompson, 

Oklahoma. I just would rehash everything that's 

already said, so every time I make a note, 

somebody come up with the same thing, and I know 

Marty doesn't want to hear it again. 

But I would say that one thing we're 

really monitoring closely is the repricing of 

loans because what's going to happen to that 

consumer who's now paying $500 a month and now 

all of a sudden he's got to pay $1,000 a month? 

So, we're really,-- whatever kind of loan it is, 

we're watching those pretty closely as the 

repricing starts happening. Loans pay off and 

then they got to start higher payments. And 

that's going to be an issue.

State, as far as we're-- we're in very 

good shape. We have no issues as far as the 
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income for the state. The biggest savings 

account we've ever had in our state. So that 

side is okay. But as this repricing happens 

that's a real concern to us.

MS. SCHMIDT: Good. Is there anyone 

on the-- attending virtually that would like to 

comment?

MS. EBERLEY: Melanie just raised her 

hand. Melanie?

MS. HALL: Hi there. Thank you so 

much for making a virtual option available. 

Traveling to D.C. from Montana isn't always easy, 

and so I appreciate being able to participate in 

this way.

Because the good Commissioner from 

Oklahoma brought up repricing risk, one of the 

things that we're watching carefully is actually 

probably a small problem, but it is something 

that I could see coming up as an exam issue, and 

that is we have community banks here in Montana 

that, due to interest rate issues, are having 
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challenges in the residential real estate market 

with customers being able to afford the takeout 

on a construction loan. 

They're getting to the end of the 

construction process and due to increased costs 

of housing and housing construction here, the 

borrower is not necessarily able to qualify for 

a loan in the secondary market. And so, we have 

banks working with customers to try to sort of 

bridge the gap until rates come back down and 

maybe they're able to afford to get into a more 

traditional mortgage.

So I just raise this as a-- I don't 

think this is an issue for-- that's going to 

collapse the global economy, but I do think that 

it is an issue that we might have examiners seeing 

going forward that we need to provide some 

direction and support for our community banks, 

quite frankly, doing this in order to help 

customers get from a construction loan into 

hopefully a mortgage loan at some point in the
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future. The speed at which rates have increased 

has really impacted construction lending, 

especially in states that are housing-challenged 

in the way that Montana is right now. Thank you.

MS. EBERLEY: Thanks, Melanie. It's 

a good reminder that we have guidance outstanding 

in so many places that talk about the importance 

of working with borrowers and working with them 

early, and that usually leads to the best 

outcome. And I think you just emphasized that 

point for us.

So, let's see. Dawn Holstein has her 

hand raised.

MS. HOLSTEIN: Hi everyone. Yes, just 

to chime in for-- with everyone. Totally in 

agreement. I'm Dawn Holstein from West Virginia. 

And on your economic charts I think we were 

probably one of the lowest in GDP growth. But to 

that point we're also typically not a big boom 

state, but also not a big bust state, so we've 

stayed relatively constant. I agree with all the 
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points that have been made today. Very accurate 

to West Virginia as well. Our monitoring has, of 

course, been heightened, but no real changes to 

our examination function. 

But one point that was brought up to 

me by more than one of our bankers is the Banker 

Term Funding Program. And as Commissioner Kruse 

mentioned, we have emphasized testing your lines, 

making sure there would be liquidity available in 

case that there would be a need, but there is 

also kind of an un-found stigma to participating. 

And I just wondered if you had any comments on 

that or any experience with those types of 

concerns regarding the program.

MS. EBERLEY: Yes, thanks, Dawn. 

We've certainly heard the concern and done our 

best to emphasize from a regulatory standpoint 

there is absolutely no stigma to using the 

discount window, making sure you've got access, 

getting your collateral cleared, being ready, and 

also to using the Bank Term Funding Program.
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We conducted a webinar; we being the 

Federal Reserve, the FDIC, and the OCC, back in 

May where we delivered this message. And then we 

updated our interagency guidance where we also 

delivered the same message; and that was in July, 

that it's important to have a variety of funding 

sources. The more the better, you know? And 

that really is the goal behind having a 

contingency liquidity funding plan. A 

contingency plan that focuses just on one source 

of liquidity is not much of a contingency. 

And so, depending on the speed of 

need, the amount of need, there are going to be 

different sources that are going to be better 

sources. So, it's really important. And that's 

one thing that we've been reinforcing through our 

exam program. I think you have, too. But we 

continue to hear the pushback on the stigma, and 

I think we all just have to work collectively to 

say that's not the case. There is no stigma. It 

makes sense for banks to be prepared. That's what 
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they're supposed to do. Thank you for raising 

that.

MR. C. COOPER: Doreen, if I could 

follow up on that? I completely agree with the 

collaboration I think we've been able to do in 

this regard. When the focus turned to liquidity, 

I think that some of the banks felt like they 

could tap into that-- those funds very easily. 

When we started asking questions about it, it 

became obvious that maybe they needed to do a 

little bit more due diligence and prepare.

I do think though that through the 

effort that was all put out into our examination 

process the questions our examiners are asking, 

at least in my opinion, our banks have better 

data in this regard. It's easier now to get the 

liquidity numbers that before it might have taken 

a week for them to provide. Now you can basically 

get it in an hour or so. That means a CEO can 

get the information quicker. And I just think 

that just shows that when we work together, I 
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think we can come out with a much better product. 

And so I'm very comfortable now that our 

banks-- their systems are even better than they 

were, let's just say in April.

MS. EBERLEY: Thank you.

MS. SCHMIDT: Any other comments? 

(No audible response.)

MS. SCHMIDT: I'd like to just close 

with one comment to follow up on something James 

said about the importance of communication 

between the agencies on commercial real estate. 

And if you're not aware, we do have a CRE Working 

Group that the CSBS participates on. We meet at 

least quarterly. And we're talking about things 

like the CRE sectors, the exposures, what we're 

seeing in appraisal values, kind of, out-of-area 

lending, and loan grading systems. So, we are 

comparing that information. So,-- if you weren't 

aware, I wanted you to be aware of that. And 

we're learning a lot, and that is important to 

our strategy. 
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So, Doreen, do you have some closing 

remarks?

MS. EBERLEY: No, I just really want 

to thank you. And maybe I'll,-- actually I will 

touch on one thing. Kevin, I think you said it, 

that what you were saying is that institutions 

generally had better risk management practices 

this go-around. And I would say through this 

monitoring effort, we've all been monitoring our 

institutions for a number of years now, coming 

really out of the last crisis; we never stopped, 

and actually heightened a bit.

So, we're seeing the same thing. 

We're seeing a general improvement in risk 

management practices over time, fewer criticisms 

of risk management practices. So, banks doing a 

good job. And you also raised the point that 

there were institutions that were highly 

concentrated, but they had good risk management 

practices and they made it through last time. 

They didn't fail, right? They might have had 
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some asset quality issues, but they recovered. 

There were institutions that had lower 

concentrations and not very good practices at 

all, and they succumbed. And so, it really is 

about management's focus on managing that 

concentration risk.

Okay. Thank you. Camille and 

Krishna, I really appreciate it.

And thanks to everybody for the really 

great discussion. We'll go ahead and move onto 

our next topic, which is Nikita Pearson, who is 

Deputy to the Chairman for External Affairs and 

Director of our Office of Minority and Women 

Inclusion. And Nikita is going to provide an 

update on the 2022 Financial Institution 

Diversity Self Assessments.

Thanks, Nikita.

MS. PEARSON: Good afternoon. So, I'm 

from Georgia like Kevin, so good afternoon.

(Laughter.)

MS. PEARSON: All right. Thank you. 
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So how many of you have heard about the Financial 

institution Diversity Self Assessment?

A couple of you? Okay. Great. 

Awesome. So, I'm here to share a little bit more 

about that with you today. And so, you should 

know that as I share with you, I'll share with 

you about the program, the purpose of the 

program, how we administer the program, what 

we're trying to accomplish. I ask you to think 

about the questions that you have. I'm happy to 

answer any questions that you have. 

I didn't come to the table without an 

ask. I have an ask of you. And also know that 

you should feel free to have uncomfortable 

conversations with me. I'm comfortable with 

having those uncomfortable conversations. Coming 

from being a bank examiner supervision over to 

this work I've learned to be comfortable having 

uncomfortable conversations.

As I go through the program today some 

of the things that I will do is make sure that 
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you first know that we do this work as a part of 

Section 342 of the Dodd-Frank Act. Section 342 

came about in 2010. Then in 2015 the agencies 

issued the policy statement that set forth these 

standards. And in the standards we then started 

putting out the diversity self-assessment. This 

is a voluntary self-assessment that we issue out 

to banks.

Now, we found that although the FDIC 

is the primary federal regulator for over 3,000 

banks, that less than 200 actually voluntarily 

submit the self-assessment to us. And when I had 

the opportunity to come over to OMWI, one of the 

first questions I asked myself is why is that? 

OMWI has the responsibility of 

assessing diversity policies and practices of the 

banks that we regulate, but I think one of the 

first things that we needed to do is to translate 

this purpose into banker language. It's not just 

an exercise of collecting data. This is really 

an exercise of helping a financial institution 
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take an assessment of where they are and how can 

they better position themselves to better serve 

their communities and better service their banks, 

to position their banks to be-- in a better 

financial position. And let me tell you what I 

mean by that.

Remember that I said I'm a 

Commissioned bank examiner, so I couldn't help 

myself. In 2019, the Federal Reserve issued a 

study that said, that revenue ratios increased 

once the share of women on the board increased 

just 17 percent. Just 17 percent of women on the 

board increased revenue ratios. In 2015,

McKinsey issued a study that found that 

businesses in the top quartile for racial and 

ethnic diversity are 35 percent more likely to 

have financial returns that are above the 

national industry. 

You've heard a lot of challenges 

facing the industry. When you have a diversity 

of thought, you have an opportunity there to have 
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different chances to have innovation to address 

these challenges. So, I say all these things to 

say, this isn't an exercise, a regulatory 

exercise, it's not a “nice to have.” It is good 

for business. And we as regulators, it is 

important for us to promote this.

So, when I think about this, we talk 

about, in our examination function, that 

management is a key factor for the success of a 

bank. Diversity, equity, inclusion, and 

accessibility helps promote that. I just pointed 

to a study from a peer regulator that points to 

how this effort can help support revenue or the 

earnings of a bank. I also pointed to, or I'm 

sure I can find, a number of different studies to 

talk to how diversity can also help promote how 

a bank may better help serve their community if 

they have more representation from a community.

So, with all those things being said, 

I ask myself,-- we put those things out and we 

rebranded it the way that we communicated this 
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out and put it into banker language,-- why still 

do we not get this information from financial 

institutions? And I got some feedback. 

First feedback was that our financial 

institutions do not trust us with this 

information. That is because they think we're 

going to use it against them, and it will show up 

in their examinations. We do not use it in their

examinations. It is not included in our safety 

and soundness, consumer protection, or CRA 

performance evaluations.

They believe that their information 

will be shared. We by law are required to follow

FOIA, but otherwise we do not share individual 

bank data. 

They do not believe that they have the 

time or resources to do it. They have a lot of 

things to do, particularly community banks. The 

large banks have chief diversity officers, but 

the smaller banks, community banks do not. We've 

worked through the process to automate what we do 
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to reduce the amount of time. And then for the 

banks that file EEO1s, they'll find a lot of the 

information that we ask for, they already have it 

because they complete EEO1s or they have 

affirmative action plans.

In addition to that, they do not have 

to submit the information to us in the format 

that we request it in. They can actually 

submit,-- if they want to just send us their 

affirmative action plan or their EEO-1, they can 

just send it to us that way. We prefer it in our 

format, but they can send it to us in any format 

that they choose to.

They also think that they-- they're 

concerned about-- they don't have a good story to 

tell, so they don't want to send it to us. And 

what I say to them is that this is just an 

assessment of where you are, and it's up to you 

on what you decide to share with us. If you 

decide not to answer a question, you don't have 

to answer the question. We'd prefer that you 
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answer all the questions, but you don't have to. 

So those are some of the things that 

we've heard. And so, my ask of you today and the 

reason that I'm sharing this with you is because 

my desire is to share with you what I've heard,

and so you'll know what the answers are. And so,

if you hear this from the financial institutions, 

you'll know what to respond. 

But if you don't remember anything 

else that I say today, it's only one thing that 

you need to remember. If a financial institution 

or your examiners have a question about the 

program, the only thing they need to remember is 

bankdiversity@fdic.gov. bankdiversity@fdic.gov. 

If they remember that email address and they send 

a question to us, someone from our office will 

get back to them and answer the question. We 

will work one on one with the financial 

institution. 

The reason when we collect the data 

from the financial institution and how
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we're-- our goal to help financial institutions. 

We collect the information, and we look for 

promising practices across the industry. Then we 

publish it out, out on our website. The reason 

this is particularly helpful for community banks 

is, again, community banks are likely not to have 

chief diversity officers and hire consultants to 

do this type of work for them. But we can 

identify those promising practices that may be 

beneficial, and they can look through it and 

determine something that they might want to try 

to explore. And that is how we can be beneficial 

with the information that's shared with us. 

This is not a exercise of where we're 

just trying to collect data for the sake of having 

numbers and putting it out. This is an exercise 

of how can we help community banks not only 

prepare themselves to be stronger financial 

institutions, but also prepare themselves to 

better serve their communities. And that's how 

we view data should be used and collected. That 
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is the purpose of the Financial Institution 

Diversity Program, and that is our goal in 

administering the program.

So that's the gist of what my prepared 

remarks are, and now I want to pause there to see 

what questions you have for me.

MR. HAGLER: Nikita, I may have 

misunderstood. Did you say that the self

assessments that are provided to the FDIC, would 

be subject to FOIA requests?

MS. PEARSON: They can be.

So, yes, so we're required by law to 

follow FOIA. There is, and so I'm looking for 

the attorneys in the room.

I'm not an attorney, Kevin, I'm an 

accountant. But there-- financial institutions 

can mark their self assessments as commercial, I 

can't remember what the term is.

So, let me get you the official 

response on that.

MR. HAGLER: Okay.
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MS. PEARSON: It's in our Financial 

Institution Letter.

I'll get you an official answer, 

because I don't want to tell you the wrong thing. 

But it can be marked, but attorneys will have to 

look at it to determine how it applies to FOIA.

MR. SALAZAR: Nikita, do you provide a 

state breakdown on the number, on the banks that 

have responded?

So, for example, two in Maryland, 10 

Oklahoma. Is there a way to figure out where the 

responses have come from?

MS. PEARSON: Yes, we do have that 

information, and we can get it for you.

MR. SALAZAR: Yes, that would be great. 

Thank you.

MS. PEARSON: Yes.

MS. GALLAGHER: Nikita, I'll just make 

an observation. I gave a speech four years ago 

and I talked about the McKinsey study, and I 

talked about Harvard Business School, and I talk 
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about diversity of thought and driving the bottom 

line.

And so, this is an area I care 

tremendously about for any business. And I'm 

proud that in Massachusetts, we have a number of 

banks that are run by women, that are, have 

diversity in senior management and in boards.

Our first deputy commissioner in 

Massachusetts, Cindy Begin, organized an event 

earlier this year with some stakeholders, 

including law firms, banks, this group called 

Bank on Women, which you probably are familiar 

with.

To try and promote board,-- bank,--

community banks increasing diversity on their 

boards.

We had a number of our banks 

participate, and I think we have real leadership 

in that space.

And there's always more, always more 

that can be done. So, I think this program is 
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very interesting. I like that Tony, it would be 

great to know, it's the voluntary nature is 

important.

But you know, if only 200 banks are 

participating, why aren't more, especially if 

you're delivering a message that this can 

actually help your bottom line.

We've been pushing that as a 

conversation piece in Massachusetts. And I'm 

proud of the institutions, certainly the 

institutions that we oversee in Massachusetts, 

because they are leading in this space.

So, I just thank you for your 

presentation.

MS. PEARSON: Thank you, Megan.

Interestingly enough, the 

Massachusetts Bankers Associations invited me not 

long ago to do a webinar with them.

And, there was a banker in the group 

who mentioned that their bank had completed the 

self-assessment every year since 2017, but 
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they've never sent it to us.

And, they found it to be particularly 

helpful, but because of the number of things that 

I mentioned, is why they never sent it.

But this year, we confirmed this year 

after that webinar they decided to send it to us 

for the very first time.

And so, I think it helps us to just 

have meeting people where they are. Having those 

engaging conversations, and just continuing to, 

to talk about it.

And having more and more people 

speaking about it's a good business case, having 

more and more people saying, having, sharing 

their good experiences with it, I think is 

particularly helpful.

Thank you for that.

MR. J. COOPER: Could, I have just one 

question. Could you, you mentioned promising 

practices.

And I think that, could you give a 
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little bit more information on, on that in terms

of things that bank are doing to really promote 

this?

I mean, I recognize it has to start at 

the top of an organization, and you know, the 

whole, the whole notion is, is, has to be driven 

by executive leaders.

But lots of things, there's lots of 

components to it. Employee resource groups; 

other kinds of, other kinds of, you know, 

opportunities at the organizational level.

So, I'd just be curious and, kind of,

what stands out in your mind.

MS. PEARSON: That's a great question.

One thing that stands out in my mind 

right now is recruitment, hiring, staffing. 

That's a common question that I hear about.

So, a promising practice that I hear 

about is how do you, and when I say you, the 

financial institution, engage with expanded 

group, or reach broader groups for potential 
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hires.

So, for example, financial 

institutions have shared with us that they're 

taking unique approaches to reach different 

groups.

So, they are partnering with for 

example, maybe high schools to have early 

entrance into hiring programs.

They are reaching out to minority 

serving institutions, maybe HBCUs, or Hispanic 

serving institutions.

They are maybe having some other type 

of work development, workforce development 

programs in their communities.

Because some mentioned that they may 

struggle with hiring. And, that's something that 

I found to be a promising practice.

So, how do you develop an interest in 

a career to come into a financial institution 

early on, and to get the desire for a community 

bank, for that applicant to want to stay at that 
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community bank in that community versus coming on 

and then going on to another area, a large urban 

area, or a larger bank, right. And, how do you 

do that?

And in addition to that, another 

promising practice is, what type of workplace 

flexibilities are being offered for different 

groups of people to be able to maintain their 

work/life balance, and their, you know, their 

family responsibilities, as well as their work 

responsibilities.

So, those are the different types of 

things.

Did I answer your question?

MR. J. COOPER: No, that's good.

MS. PEARSON: All right. What other 

questions do you have for me? About how we 

administer the programs, what you've heard?

(No audible response.)

MS. PEARSON: All right, thank you.

(Chorus of thank you's.)
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MS. EBERLEY: Okay, thanks, Nikita, so 

much. Really appreciate it.

For our next agenda item, I'm going to 

invite up a few colleagues and we're going to 

touch on a number of matters.

We're going to start off with Suzie 

Clair, Associate Director of Capital Markets from 

the Division of Risk Management Supervision.

And, Suzie's going to talk about 

funding and liquidity risk management.

After that, we're going to have Tom 

Lyons, Associate Director in the Division of Risk 

Management Supervision Policy Branch.

And Tom's going to talk about the 

guidance on commercial real estate, loan 

accommodations, and work outs.

And then after that, Tom and Luke 

Brown, who is Associate Director for the 

Supervisory Policy Branch in the Division of 

Depositor and Consumer Protection, are going to 

speak about our guidance on third-party risk 
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management.

And then lastly, Chris Finnegan, you 

can wait if you want, Chris, either way. But 

Chris Finnegan and I will, Chris is Senior Deputy 

Director of Compliance and CRA Exams in the 

Division of Depositor and Consumer Protection.

And Chris and I are going to talk 

about our return to banks, since our examiners 

have been back onsite at bank examinations for 

just over a year now.

And then finally, I'll touch on 

training that the FDIC has provided to state 

examiners this year.

So, we'll go ahead and get started and 

I'll turn it over to Suzie.

MS. CLAIR: Thanks, Doreen. And my 

comments actually, I think Krishna stole some of 

my thunder. But more from a macro perspective. 

So, I was going to talk about liquidity and 

funding, and interest rate risk.

But my slides actually are going to 
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focus on, and charts are going to focus on the 

trends at community institutions, and kind of 

layer on some of the, the high-level macro charts 

that Krishna described earlier, to see some of 

the trends in recent quarters.

And, my data here today is as of June 

30th, so, and the way rates have gone in 

September, we think that there's going to be more 

unrealized losses on investment securities.

And again, as the Chairman mentioned, 

headwinds for institutions regarding the interest 

rate risk outlook, and economic conditions.

So, this first slide shows the effect 

of rising rates on, on bank earnings again for 

community institutions through June.

You see as we talked about the Fed 

funds rate is in the dash green line, and that is 

you know, we've all noticed is rose significantly 

at a very sharp pace.

And concurrently, we've seen recently 

that the cost of funds has taken an increase. 
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And that has outpaced the yield on earning assets 

in the first half of the year. And, that's 

leading to declining net interest margins.

On the next slide, we look at the 

effects of rising rates on liquidity. Again, and 

similar to what Krishna said earlier about the 

increases in wholesale funding, and deposit 

declines, these trends are shown for community 

institutions.

So, you see that wholesale funding is 

increasing as domestic deposits have declined. 

And, loans and leases have picked up.

Again, securities portfolios, and 

this is reflected at cost, are showing declines 

overall for community institutions.

So again, you know, we saw the reverse 

in the decline in the loan trend. So that funding 

is, is coming from the, the uptick in wholesale 

and after declines in deposits.

So, in the next slide, we see that the

rising interest rates is leading to higher cost 
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of funds for institutions. And that deposit 

costs are rising.

This slide illustrates here the 

composition and growth in the weighted average 

cost of funds, is overlaid as the red dotted line.

And, you see that over the past two 

quarters, that community banks saw shifts from 

MMDA and other savings accounts, into time 

deposits.

And, the shift in deposit types could 

be coupled with the increasing market rates, 

contribute to the significant increase in 

weighted average cost of funds for community 

banks.

So, moving to the next slide, as we 

mentioned on the prior slide, over the past year 

there's been a significant increase in wholesale 

funding.

And this growth is due in, 

predominantly in borrowing. It's centered in 

borrowings, brokered, and reciprocal deposits.
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As of the second quarter, as of June 

2023, the volume of brokered at community banks 

is shown in light blue, is at the highest level 

since at least 2018, increasing from $86 billion 

at year end, to $112 billion.

Reciprocals shown in yellow here, are 

at a new peak, increasing from nearly $70 billion 

at year-end 2022, to $100 billion as of the second 

quarter.

And then borrowings, shown in green, 

including Federal Home Loan Bank and other 

borrowings, are shown, other borrowings are shown 

in purple.

Those two increased from $108 billion 

at year end, to $143 billion in the second 

quarter.

And then, our last data slide will 

take a look at the impact that higher rates have 

had on investment portfolios.

And these are the unrealized losses 

that we've been talking about, and the Chairman 
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mentioned earlier.

Again, this is through second quarter,

and we expect that there will be even higher 

levels in, as of the September numbers given 

where rates landed at September 29th.

So, when we look at this chart, again 

you see the rapid increase in unrealized losses. 

And this is in both available for sale, and held 

to maturity securities, in both of those 

categories.

And it's consistent with the jump in 

the 10-year constant maturity, maturing Treasury 

rate that's shown in the dash blue line overlaid 

there.

So, from a capital perspective, you 

have AFS and HTM net unrealized holding losses 

that are net of tax.

They're not factored into regulatory 

capital for most community banks, because they've 

opted out of AOCI net gains or losses on treatment 

for AFS securities, in accordance with the 
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generally applicable capital rules.

So again, additionally held maturity 

securities aren't measured at fair value for 

financial reporting purposes.

So, equity capital is defined by 

generally acceptable accounting principles, or 

GAAP, does reflect AFS unrealized holding losses, 

net unrealized holding losses.

So therefore, there are some 

institutions that we have seen that have 

significantly lower GAAP equity compared to 

regulatory capital. In some cases, even negative 

GAAP equity.

And, those institutions can face 

various stresses as far as counter-parties 

willing to lend to them, and restrictions that 

those counter-parties may place on funding.

So again, it's also important to point 

out that most of the bonds that have these market 

value declines, it's not really a credit risk 

issue, it's more of a market risk issue.
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So, there may not be credit issues, 

but the market risk presented in these bonds with

significant unrealized holding losses has various 

implications for banks' liquidity, and capital.

So, moving to the next slide, this is 

just a highlight of the guidance that Doreen had 

mentioned earlier, that was issued on July 28th

by the federal banking agencies.

Again, it really, it reiterates the 

importance of contingency funding planning. And 

the events of 2023 underscored the importance of 

robust liquidity risk management, and contingency 

funding planning.

Again, this update serves as a 

reminder to maintain actionable funding plans, 

contingent funding plans that take into account 

a range of possible stress scenarios.

These are the highlights of the 

statement. And again, as Lisa mentioned the 

importance of, emphasizes the importance of 

testing the available borrowing lines.
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And as Doreen had mentioned, the 

statement encourages institutions to explore the 

discount window.

And while it explicitly doesn't 

mention the BTFP, that is also considered and 

encouraged by the institute, by the agencies.

So again, also just pointing to the 

last bullet is, again, the importance of revising 

those plans as conditions change. So, and 

understanding operational challenges.

MS. EBERLEY: Okay.

So, we've talked about liquidity a 

little bit. We've got a couple of ways we can 

go. We can stop and do Q&A now, we can go all 

the way through the presentations and do Q&A at 

the end.

Anybody want to start with questions 

now, or would you like to wait?

(No audible response.)

MS. EBERLEY: Okay, we'll wait. All 

right, Tom, you're up.
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MR. LYONS: Well, thank you.

So, I want to talk a little bit about 

the prudent CRE loan accommodations and work outs 

guidance, that we had issued in June.

So, on June 29, 2023, the banking 

agencies and the NCUA, issued the interagency 

policy statements on prudent commercial real 

estate loan accommodations and work outs.

The statement was published in the 

Federal Register on July 6th, and it's a 

principles-based resource for institutions to 

consider when engaging borrowers experiencing 

financial difficulties.

It updates and replaces the 

Interagency Statement that was issued in late 

2009. And, given the myriad of challenges and 

risks facing CRE lending, the agencies in 

consultation with the state regulators, decided 

to update and expand upon the 2009 statement.

Currently, more than 98 percent of 

banks engage in CRE lending. And, CRE loans are 
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the largest loan portfolio category in nearly 

half of institutions.

Further, the dollar volume of CRE 

lending is at an historic high, recently peaking 

at more than 3 billion.

And nearly 30 percent of the banks 

have a concentration of CRE loans exceeding 300 

percent of capital, or acquisition, or 

acquisition and development and construction 

loans exceeding 100 percent of capital.

So, in 2020, the COVID pandemic led to

stress across several property types, including 

hospitality, office, retail, entertainment, 

office, I've read office already.

The office sector remains 

particularly vulnerable. Some borrows may have 

difficulty refinancing, given the structural 

decline in office demand.

Regardless of the CRE sector, CRE 

borrowers' abilities to manage through a period 

of softer economic conditions, including supply 
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chain imbalances, labor challenges, 

geo-political tension, inflation, rising rates, 

will impact the magnitude and direction of risk 

in 2023, and beyond.

So, on the next slide, we cover, it 

talks a little bit about the objectives here. 

So, this statement discusses the importance of 

working constructively with CRE borrowers who are 

experiencing financial difficulty, and would be 

appropriate for all institutions engaged in CRE 

lending.

The agencies recognize that prudent 

CRE accommodations and workouts are often in the 

best interest of both the financial institution, 

and the borrower.

Accordingly, the statement reaffirms 

key principles from the 2009 statement that 

financial institutions that implement prudent CRE 

loan workout arrangements, after performing a 

comprehensive review of a borrower's financial 

condition, will not be subject to criticism for 
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engaging in these efforts, even if these 

arrangements result in modified loans that have 

weaknesses that result in adverse classification.

And, modified loans to borrowers who 

have the ability to repay their debts according 

to reasonably established terms, will not be 

subject to adverse classification solely because 

the value of their underlying collateral has 

declined, to an amount that is less than the loan 

balance.

So, the statement adds a new section 

on short-term accommodations. So short term and

less complex CRE accommodations are a tool that 

can be used before a loan requires more complex 

work out scenario.

It reflects changes in GAAP since 

2009, including the current expected credit loss 

methodology.

The statement also updates the 

original six examples, plus provides some new 

examples for multi-family ADC construction, and 
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income-producing hotel.

So, the statement was issued for 

industry comments fall of last year, and we 

received 22 comments. And, the statement was 

revised based on that feedback.

So next slide, please.

So, on September 14, 2023, the Federal 

Reserve hosted an ask the regulator session on 

the prudent CRE statements.

Speakers from the banking agencies and 

the NCUA walked through the guidance, which 

included a deep dive into the nine workout 

examples, one of the examples we included in the 

CRE statement and the principles discussed in the 

guidance.

The presentation had approximately 

3,400 participants, received numerous questions. 

Most of the questions were related to case 

specific issues on how the guidance would apply 

to a particular scenario, including if a 

particular workout would be accrual, or 
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nonaccrual, pass, or would be adversely 

classified. And how a bank could use the A/B note 

solution, which would be splitting the loan into 

two notes, with one note representing loss and 

charge off, with the second note also 

representing the remaining balance that is put on 

prudent repayment terms.

So, in essence, it's a very high-level 

discussion of the CRE statement. And, happy to 

take questions now or at the end. So ,I think 

we're going to the end, right?

So, we're going to talk about the 

third party, and I'll kick it over to Luke to 

start us off.

MR. BROWN: Good afternoon. Good 

afternoon, can you hear me okay? Good afternoon 

everybody.

As Doreen mentioned and Tom just 

mentioned, Tom and I will be giving you a highlevel overview of the interagency third-party 

risk management guidance that the agencies issued 
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last June.

I've already heard today a couple 

questions focused on third-party risk management, 

so we look forward to having a conversation with 

you.

Slide 2.

Prior to the agencies issuing the 

inter-agency guidance, each of the agencies had 

issued their own separate guidance for risk 

management, risk management purposes.

Each agency generally included the 

same principles in its guidance, but there were 

differences in scope and number of examples.

Given that each agency issued separate 

guidance on the same topic, some entities were 

unsure of whether the various guidances conveyed 

consistent messages related to third-party risk 

management.

Slide 3, please.

Therefore, in developing the 

interagency guidance, the agencies sought to work 
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together to make their guidance consistent, and 

articulate clear risk-based principles for thirdparty risk management.

In considering feedback received, the 

agencies understood that because of the increase 

in the number and types of third-party 

relationships, banks, particularly community 

banks, might find examples of considerations 

useful in identifying and managing risk

associated with a wide range of third-party 

relationships and for all stages of the lifestyle 

of a third-party relationship.

In July 2021, the agencies issued 

proposed interagency guidance on third-party risk 

management in the Federal Register, seeking 

public comment.

Slide 4, please.

In the aggregate, the agencies 

received over 80 comments for consideration in 

developing the final guidance.

The FDIC, OCC, and Federal Reserve 
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Board, reviewed and carefully considered the 

public comments that we received. And issued the 

final guidance in June of 2023.

And upon issuing the final guidance in 

June, each of the agencies rescinded their 

previously issued guidances.

The final inter-agency guidance 

provides a general framework which we'll talk 

about, which gives institutions flexibilities as 

they apply it.

And, it's a resource to assist them in 

implementation of effective third-party risk 

management processes.

As you know, banks use many types of 

third parties for numerous functions. All 

activities present some level of risk, so 

effective risk management is always important, 

particularly when a third party is engaged to 

provide a service, or conduct an activity for a 

bank.

The inter-agency guidance reminds 
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institutions of this key principle. Whether 

activities are performed internally or via a 

third party, financial institutions are required 

to operate in a safe and sound manner, and in 

compliance with all applicable laws and 

regulations, including those designed to protect 

consumers.

Also, banks use a, use third parties 

does not diminish their responsibilities to meet 

these requirements, to the same extent as if they 

had actually performed those duties themselves.

Recognizing that there are a wide 

variety of third-party relationships for varying 

purposes, the guidance promotes tailored risk 

management practices commensurate with the risk 

profile, the nature of the relationship, and the 

appetite of the institution.

With that, I will pass the baton on to 

my colleagues, Tom Lyons.

MR. LYONS: Thanks, Luke.

So, slide 5.
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So as Luke had mentioned, the guidance 

is principles-based resource. It's not mandatory 

that institutions you know, apply the guidance.

The guidance is not intended as a 

check list, nor does it provide a safe harbor. 

The guidance serves as a resource to assist 

institutions in implementing a third-party risk 

management, you know, practices by providing 

examples of considerations in each stage of the 

risk management life cycle.

So, those are the planning stage, the 

due diligence stage, doing a contract 

negotiation, ongoing monitoring, and 

termination.

So, the principles and examples of the 

considerations addressed in the guidance are 

meant to be applied in a risk-focused manner, to 

take into account the level of risk, complexity, 

and size of the institution as well as the nature 

of the specific third-party relationship.

Which brings us to the next slide, on 
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slide 6, which is tailoring it. Tailoring is a 

key theme throughout the guidance.

An institution can consider which 

activities discussed in the guidance within each 

stage might be appropriate for that institution, 

depending on the situation.

And, can tailor its third-party risk 

management program to its specific relationship 

and risks.

An institution may need to incorporate 

different considerations and factors, such as 

those that may be found in more specialized or 

topic-specific guidance, to appropriately manage 

the risks from some types of third-party 

relationships.

The guidance also talks about 

governance. This section discusses the roles and 

responsibilities of the board and management, the 

role of independent reviews to assess related 

controls, and documentation and reporting 

considerations to provide the necessary 
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information for assessing the effectiveness of 

the third-party risk management processes.

It highlights that the institution's 

board, board of directors, has the ultimate 

responsibility for providing oversight for the 

third-party risk management, and holding 

management accountable.

And, it also notes that institutions 

are free to structure their third-party risk 

management processes in a variety of ways, as 

long as the processes provide effective risk 

management with accountability throughout the 

third-party risk management life cycle.

There is a section on supervision. 

So, on the supervisory review section, it 

discusses how examiners will assess a bank's 

third-party risk management practices.

And, a key message from that section 

is that examiners will not examine to the 

guidance, but will evaluate the risks in this, in 

the third-party relationships, the effectiveness 
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of risk management processes, and whether 

activities are conducted in a safe and sound 

manner in compliance with applicable laws and 

regulations, including those for consumer 

protection.

Next slide, please.

So, this slide, we have a number of 

resources that are available on FDIC's webpage. 

And these, you know, relate to rules that would 

be most often applicable.

The safety and soundness standards, 

the information securities standards, and you 

know, guidance.

There's a due diligence guide that the 

agencies had put out a couple years ago for 

community banks. And, it points to the banker 

resource center.

So last point I just want to get 

across, is that relationships that are only 

between banks and their direct customers of 

traditional bank products and services, such as 
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deposit accounts, or retail, or commercial loans, 

would not be addressed in the third-party risk 

management framework that we discuss here.

Those would be covered by various risk 

management processes and rules, that apply to 

traditional lending and deposit relationships.

For instance, we have the safety and 

soundness standards for Part 364, for 

underwriting and other various rules for AML, and 

customer due diligence. Those would cover those.

And with that, I'm happy to take any 

questions on third party, or any of the other 

items.

MS. EBERLEY: Okay. Well, we'll wrap 

up. I want to share a few comments on training 

and on our back to examination work.

And, then we can open up. We'd like 

to hear your views on any of these topics.

But I think one of the key, this is 

the section of the agenda is called State and 

Federal Coordination.
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And one of the key ways that we 

coordinate is through our examination activities 

that we do, either on an alternating, concurrent, 

or joint basis.

And also, in training our examiners. 

And so, I'll start with training, and I wanted to 

share with you that to date, we have, the FDIC 

has hosted approximately 627 state examiners and 

five training sessions.

And, these are on topics including 

current expected credit losses implementation, 

minority depository institution refresher 

training, and revised instructions for special 

mention.

And then in November, we've got a 

couple of other offerings coming. One on state 

only training on third-party relationships are 

really to talk about this guidance.

And then in 2024, we plan to offer a 

state only minority depository institution 

refresher training session.
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In addition to that, 378 state 

examiners have attended the FDIC's 

pre-commissioned examiner courses. And, an 

additional 177 are registered to attend a course 

through the end of this year.

Finally, 128 state examiners have 

attended FFIEC schools, while an additional 33 

examiners are registered to attend by the end of 

this year.

So, a key commitment to continue to 

provide training across the industry, or the 

agencies.

Back to banks front, I wanted to share 

a little bit with you that we went back to banks, 

it was a year ago really, last September, when we 

ended our mandatory telework period, and then our 

maximum telework period.

And so, it's been a little over a 

year. I would say, and I think Chris would agree 

with me, that we had a little bit of a slow start 

of people adjusting, and trying to figure out how 
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to manage a team of examiners differently than we 

did before.

Previously, you started the 

examination offsite. You went onsite as a team. 

You finished offsite.

And now we've got folks kind of in 

different places throughout that examination 

process, from planning, to submitting a final 

report of examination.

But I will say, you know, in the past 

few months, I would really say over the summer it 

feels like we've really gotten into a groove, and 

that the exam teams are really embracing the new 

processes.

We'd been working to reduce onsite 

examination hours before the pandemic. That was 

a key employee retention initiative for us.

And so, for RMS, we had reduced our 

onsite percentage from about 70 percent to about 

50 percent of the examination.

In DCP, prior to the pandemic was 
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about 60 percent offsite. And then since we've 

come back, our onsite percentages are a little 

bit lower than that.

We're really trying to leverage what 

we have learned through mandatory telework, and 

take advantage of it. Take advantage of the 

technology that we adopted, thank goodness, 

before mandatory telework.

That we had really started exploring 

these things or it would have been very, very 

difficult to pivot. So, I'm glad that we had 

headed down the path that we did.

I would say that the feedback that 

we're getting thus far, is really very good. 

Pre-commissioned examiners in particular, are so 

excited to be in banks, to be working with their 

co-workers.

Very difficult job to learn sitting 

around a table, or you know, a virtual table when 

everybody's on their own home and you have to 

ping somebody on a screen to ask a question.
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Much easier if they're sitting 

together in either the bank, or the field office.

And, we've heard really positive 

feedback from bankers, as well. We've been doing 

a round of the banker outreach sessions here in 

Washington, over the past couple of months.

And they routinely give us positive 

feedback. We also get positive feedback through

our post-examination surveys that bankers are 

very happy to have examiners back in person, 

being able to speak to them face-to-face.

It's just, it's a different kind of 

communication, and very much valued.

I'm happy to say too, we had lost, 

well not happy about this part, we'd lost some 

efficiency during mandatory telework.

It actually took us longer to complete 

examinations on the safety and soundness side, 

anyhow, when we were completely offsite, than it 

did when we were completely in person.

We've regained some of that efficiency 
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now that we're back. We're not 100 percent yet. 

We're not back to where we were.

I'm not sure we will be because we've 

added some procedures. Some a little before the 

pandemic; some during the pandemic.

So, we're hitting a new normal, but 

we've recaptured some of the efficiency that we 

lost.

And I think, you know, one challenge 

that we still all need to really focus on, and I 

really appreciate your views on this, is ensuring 

good communication when we've got team members in 

different locations.

It's different right, we're not all 

offsite, onsite, offsite. It's people 

everywhere.

And, it's not just FDIC examiners when 

it's joint. It's the state examiners, as well. 

And then you have the banker that's possibly in 

a third location. And maybe some folks are with 

the banker, some folks aren't.
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What kind of tools can we give our 

examiners in support, to make sure that we've got 

the best communication possible in those 

scenarios.

So, we really just wanted to bring 

that up, and get a feel from you how you are 

looking at it, what your thoughts were. Anything 

that you think we need to work on collectively.

And we'll open up the conversation for 

that, or any of our other topics, training, third

party, commercial real estate work outs, or 

liquidity and funds management.

And it looks like I may have something 

online here. No, okay.

MR. FINNEGAN: And Doreen, I'll just 

add one thing if I could. What we did on the 

consumer compliance side, is that I echo 

everything that Doreen just mentioned.

We have learned, you know, over the 

pandemic when we went, you know, 100 percent 

offsite. It has been a tad bit of a slow start 
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coming out.

And, we're getting somewhat near where 

we were before the pandemic. But we did do some 

lessons learned.

What we learned during the pandemic 

and on that efficiency as we come out. So, we're 

trying to do different technology. We were 

talking about that earlier.

Different things that we could do in 

this hybrid world that we have with the bank, and 

examiners being all different ways.

So, one thing we did do, was on our 

consumer compliance manual back in September 

about a month or so ago, we updated that with 

some, kind of, guidance on what we were doing 

onsite/offsite.

So, this is, it's in our, you know, 

public exam manual so it gives the bankers an 

idea, as well as our examiners, things that we 

do, kind of, expect that would be done onsite 

versus offsite.
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And, some of the onsite things is the 

meetings are very important. Observing what's 

going on at the institution, and those kind of 

things.

So, we actually put that in as part of 

our exam manual. And we also updated our manual 

on our complex bank program, which we made 

permanent in the last year or so because again, 

there's a lot of offsite work that's done there.

But it's very important for us to have 

that onsite presence, as Doreen mentioned. And, 

I think you all agree to that.

It's all based on risk, you know, we 

don't set a certain percent needs to be 

onsite/offsite, but it's based on the risk of 

that institution with our examiner-in-charge 

working with their local supervisors on that.

But we have gotten, just like Doreen 

said, we've gotten a lot of good positive 

feedback from the bankers about us being back 

onsite with doing these exams.
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And, I think it makes it a stronger 

exam. And we actually require every exam to have 

some onsite presence, so.

MR. HAGLER: Yes, if I could, just a 

couple comments.

Doreen, I am particular about the 

examination program. I agree with everything you 

said, and the feedback I'm getting back from the 

bankers too, is that they greatly appreciate and 

enjoy the hybrid approach.

The only negative comment I got, and 

it may be a little dated at this point, was the 

prolonged exam cycle. And I assume they were 

talking about my team, not yours.

But yes, I think that would be 

universal that it was, and I think it was that, 

we've probably gotten a lot better at it now.

But the coordinating and the funneling 

questions through a central point. Just the 

logistic pieces.

Because I think at first we were 
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driving them crazy with everybody asking 

everybody questions via email. Then funneled it 

and working that out.

So, I think that-- that's come a long 

ways.

I think it was a fed seminar earlier 

this week that was talking about a study that 

they were citing that said completely offsite 

showed a 3 to 10 percent decline in efficiency.

Hybrid was somewhere between 13 to 20 

percent increase in efficiency.

So, I think it was bearing out what we

were experiencing. But that's a sweet spot to be 

in now, and going forward.

As far as the CRE accommodations and 

workouts document, it made a lot of sense to me, 

and I really like the timing of it.

Because it really telegraphs a warning 

to the industry, especially the one in my state, 

that we're talking about workouts and 

accommodations here, maybe you should rethink 
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some of those concentrations in that area.

So, I'm sure that wasn't well, it 

wasn't very subtle I thought, but I loved it. So 

appreciated the timing of that, whether that was 

intentional or not.

MS. EBERLEY: Yes.

MR. HAGLER: Suzanne, your comments 

with regard to the inter-agency statement. I 

appreciate that even in the highlighted version, 

you brought in the concept of operational 

readiness three times.

I think, you know we've all examined 

for CFPs over the years. But it became very real 

after the spring.

So, I think the more we can reiterate 

those concepts and operational readiness as 

regulators, the better.

MS. EBERLEY: Thanks.

I will note that Greg Gonzales has his 

hand raised. Greg? And Greg did ask a question 

earlier, Tom, that I said we would defer to this 
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session.

I think it's probably for you and 

Luke.

MR. GONZALES: Yes, just a couple of 

things.

First on the hybrid exams, just to 

echo that, you know, we're hearing a lot of good 

comments from our institutions with regard to 

hybrids.

And we're trying to, you know, just 

based on risk, trying to scope that out on a exam

by exam basis. So, good comments there.

On the third-party guidance, maybe a 

couple things. I've heard some comments from a 

community banking standpoint, that you know, it's 

still challenging to understand how to go about 

tailoring that guidance to the risk profile, in 

a way that would meet the federal agency's 

expectations.

Are you all working on anything to 

provide any additional tools that might help 
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community banks appropriately calibrate?

MR. LYONS: Do you want to start?

MR. BROWN: Go ahead.

MR. LYONS: So, I know one thing, Greg, 

thank you very much for that question, Greg. 

Really do appreciate that.

One of the things that we are talking 

about with the Fed and the OCC, is additional 

resources that we may be able to put out there, 

specifically for community banks.

We are discussing with them, you know, 

what additional resources that we have. I really 

don't have anything to give you any details on 

that, but it is something that we're continuing 

those discussions and hopefully, we'll be able to 

talk with you about that more thoroughly in the 

near future.

We did have a conversation, ask the 

regulator call that was hosted by the St. Louis 

Fed.

So that, we did have that back in 
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July. And took a lot of questions, and we 

responded to a lot of questions on the third party 

as it related to that.

And I think you hit on one thing that 

we tried to get across in the guidance, which was 

the tailoring aspect, you know, for the 

institution.

So, what makes sense for the 

institution, and what makes sense for, you know, 

that particular, you know, activity that they're 

engaged in is really where we're trying to, to 

drive them is make sure that they're thinking 

about this broadly.

What makes sense for that activity. 

Different activities or different relationships 

are going to require different, just based on 

what it is, a different way to manage that, that 

relationship.

Some of them are going to be more 

important, so you're going to, institutions 

really should put a lot more attention on that.
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Because there's more reliance on that 

particular activity. Others, it may be a little 

bit less.

You know, do you need the same kind of 

risk management processes for say, you know, 

someone that maintains the grounds and your 

branch network as it is, you know, for somebody 

who's got, who handles all your data processing.

So, it's different things for 

different folks, and not everything's going to 

be, you know, it's not a one size fits all.

So, it's a challenge, but the 

institution should be thinking about it and how 

they're best going to be protecting themselves in 

managing that relationship, so that they 

understand the risks that it presents to the 

institution and design their risk management 

processes that way.

Luke?

MR. BROWN: Yes, I can't really add 

much to that. The guidance just went out in June. 
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There's a lot of information in that guidance and 

as John, as Tom just described, it's a framework.

And maybe that's kind of part of the 

question. It's not a checklist where you just 

go, you know, from 1 to 10 and you take these 

steps.

It's really driven sort of bank to 

bank and quite frankly, relationship to 

relationship. You know, each relationship is 

entirely different. The risk is entirely 

different.

And so, there might be sort of a 

discomfort in that it does not have the specific 

answers, but it provides a framework in terms of 

these are the things you should be thinking 

about. These are the types of risks you should 

focus on. This is the type of due diligence you 

should have.

And, the agency spent a lot of time in 

putting all these concepts together in one 

coherent place.
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And hopefully it will be helpful, but 

that's a helpful comment to be aware of.

Thank you.

MR. GONZALES: Yes, and I appreciate 

those comments on that. That's very helpful. 

One last question.

I was curious as to and you touched on 

it with regard to how supervise how examiners may 

be using this.

Could you speak to that as to whether 

your examiners will cite to this guidance at this 

point, with regard to any issues that they may 

see, with regard to third-party risk management?

MR. BROWN: Should I go first this 

time?

MR. LYONS: You go first.

MR. BROWN: So, this is guidance. It's 

not a regulation. So, this is not a requirement. 

What it does is it lays out a number of 

supervisory and risk management concepts for a 

bank to understand and to navigate as they're 
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trying to mitigate risks.

I'll say from the consumer compliance 

perspective, you know, again, it's not guidance 

so I'm sorry, not a rule so we would not cite to 

it.

But we would do a compliance 

management review, and we'd analyze the 

relationship and the risks, and the activities 

that the institution has been engaged in from a 

compliance risk perspective.

And you know, we would certainly take 

appropriate actions if we saw any concerns from 

a risk perspective.

But we won't be citing to the guidance 

itself.

MR. GONZALES: Okay. That's very 

helpful to me. Thank you so much.

MS. EBERLEY: Yes, Greg, I want to add 

just a couple more thoughts.

And, you know, when examiners talk 

about challenges that an institution is having 
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with respect to a third-party relationship, the 

underlying problems, I mean the third-party 

guidance tells institutions how to comply with 

the law.

You know, it gives institutions 

guidance about the things they need to do to make 

sure that they stay in compliance.

The laws that actually underpin this, 

that we frequently see challenges with, are 

internal controls and management information 

systems.

Those two standards, and the safety 

and soundness standards in Part 364. And also 

the Bank Secrecy Act.

So, that's, I'm talking about on the 

deposit side of third-party relationships. If 

you're talking about the lending side, I would 

add ability to repay, as well.

So, those are the things that an 

institution has to pay attention to. The 

guidance helps them create a framework that will 
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help them engage in the activity, and compliance 

with law and guidelines.

The other thing I wanted to point to 

so that we don't forget about it, is that in 

August of 2021, the FDIC, the Board of Governors 

of the Federal Reserve System, and the Office of 

the Comptroller of the Currency, issued a guide 

specifically for community banks about how to 

conduct due diligence on Fintech companies, 

financial technology companies that they were 

interested in partnering with.

So that's for the FDIC, it's Financial 

Institution Letter 59-2021. But it gives 

practical advice about how to go through the due 

diligence process.

And, that's one of the things I think 

it's fair to say we hear from community banks 

that is a challenge for them, knowing where to 

start with the due diligence, having limited 

resources to conduct the due diligence.

So having a resource guide that helps 
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them, and gives them some guidance about you 

know, where to start, what to consider, I think 

is helpful, and I did want to point that that's 

still outstanding on our website.

MR. GONZALES: Good, thank you and I 

look forward to hearing anything more about 

additional tools that you may be working on, so 

thank you.

MS. EBERLEY: Thank you.

MR. C. COOPER: So, Doreen, I'd like to 

make two comments. First on training.

I think we all agree that training a 

bank examiner is, is so important. And I firmly 

believe that once an examiner is trained 

properly, that when they go out and they have to 

meet things like offsite, onsite, they can be 

very adaptable.

But we have to get the training done 

first. And so, we all need to concentrate on 

that.

Y'all do a great job on that, and but 
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if they're not trained, none of it works. I mean, 

we're going back to basics on that.

And then, kind of a follow-up on 

something else. On the commercial real estate 

work out guidance that you first started talking 

about, one of the things you said was that the 

guidance was in consultation with the states. 

And that was true.

And then on the third-party risk, 

third-party guidance, it was solo without the 

states.

And so I get a little bit confused 

sometimes why things are done with the states, 

some things are done without the states.

Since we do roughly 50 percent of the 

work, I guess we could argue over that a little 

bit.

But 50 percent of the work, 79 percent 

of all the banks are state chartered. So by 

number, we regulate more banks than anybody.

I just would like for us to try to 
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explore how we can participate more in these 

guidances. I do think we can bring some things 

to the table, that would be beneficial.

I think we're, I've always said, we're 

a little bit closer to the fire possibly than our 

federal counterparts.

So I just, I request that possibly on 

these guidances that we look for how to bring the 

states more involved in it.

MS. EBERLEY: Thank you.

MR. THOMPSON: I'd like to make a 

couple of comments that first thing on the 

training, I really appreciate the ability to help 

put the state examiners in the training program.

Because I agree with Charles 100 

percent. If they're not trained, then it's a 

problem for the bank, and for us. So, I 

appreciate the training we get.

And, we've been back onsite in 

Oklahoma for a little over, probably a couple 

years. We're one of the states that our governor 
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didn't shut much down.

So, we were out early on. But what 

we did was we called every bank and talked to 

them about do you want us to be onsite, what do 

you want.

And then, at that time since it was 

really shut down time, was I allowed the examiner

charge to make his choice whether he wanted to go 

onsite.

Because it was right in the height of 

that. And so, 90 percent of them wanted us to 

have somebody in the bank.

Some of the real small banks would 

say, we don't want those folks from Oklahoma City 

coming down here, because they're going to bring 

COVID to us. So, we didn't go to those banks.

But we've been doing the 

offsite/onsite for, like I said, little over two 

years. And it's really helped us as far as timing 

because when you, when you have to go to the 

panhandle of Oklahoma and you finish your 
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examination on Wednesday or Thursday, you can't 

drive out there for a one-day deal.

Well now when they finish it on 

Wednesday or Thursday, they go to the next bank 

because they're doing it offsite.

So, we're actually worked ahead. And 

we work very closely with Oklahoma City FDIC when 

they weren't going into the banks, and it was 

their exam, we would still send somebody for them 

to communicate, so you'd have somebody there 

although it wasn't the FDIC.

It was the State doing it. So, we 

were, kind of, working with them ahead of when 

they couldn't go into the bank.

And so, it's worked very good for us. 

We don't plan on ever going back to 100 percent 

in because we're doing particularly all BSA, IT 

and that offsite. The bank doesn't know where 

you are anyway on those.

But on, particularly on loans that are 

complex, we're going onsite looking at those, 
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always my EIC and detail would be onsite, and 

we're there to do the wrap up.

So, and it seems to be working very 

well with us, and the cooperating with the FDIC 

now that they are going back onsite.

MS. EBERLEY: Great, thanks.

MR. ALLARD: We've been back in banks 

since probably August of 2021, and I know we all 

stress the importance of communication to our 

examiners.

But even in this hybrid environment, 

it's even more important.

MS. EBERLEY: Yes.

MR. ALLARD: My observation would be I 

think our teams collectively have gotten very 

good at understanding what conversations they 

need to have at the bank, and what conversations 

they can have more in a remote manner.

MR. C. COOPER: Yes, I agree.

MS. EBERLEY: Okay.

All right, well that actually brings 
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us to the end of our agenda. I really appreciate 

everybody's participation, and the good 

conversation. So, thank you very much.

I want to thank all of our presenters, 

thank you. Thank you to all of our committee 

members for traveling in, and those that are 

participating virtually, thank you very much.

Before we close, I do want to give our 

leadership a chance to make some comments. Vice 

Chairman Hill?

VICE CHAIRMAN HILL: Nothing from me. 

Thanks, everyone.

MS. EBERLEY: Director McKernan?

(No audible response.)

MS. EBERLEY: Chairman Gruenberg?

CHAIRMAN GRUENBERG: Thanks, Doreen.

Just to thank you all for your time 

and your participation. Very helpful discussion 

today; to be continued.

Thank you all.

(Chorus of thank you's.)
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CHAIRMAN GRUENBERG: And thanks to the 

staff for their excellent presentation.

MS. EBERLEY: Thank you very much.

(Whereupon, the above entitled matter 

went off the record at 2:53 p.m.)