Speech
Superintendent Taylor's Remarks To the New York Bankers Association: Revenue Restructuring and Future Plans

January 10, 2005

Good afternoon.

Thank you, Mike Smith, for inviting me to speak to you today.

I know that some of you state chartered banks in the audience are fearing sticker shock as a result of the Department's revenue restructuring. As I have said to many of you, yes, in almost all cases your assessment will be going up - unfortunately in some cases significantly.

But, it will still be lower than what the OCC would charge - but that is not the main point.

The main point is that this entire exercise resulted from a long, long overdue inward look at the workings of the Banking Department. I don't want to bore you with the minutiae, or frighten you by divulging some of the discoveries we made.

Suffice it to say that what we found, and what we realized we had to do in order to fulfill our statutory mandate, has resulted in a comprehensive reorganization of the department - from the way we raise revenue to how our divisions are organized.

And we have further to go, and we have ideas and plans for getting there. We will need your help and input along the way.

But first, about revenue restructuring - as more than a few of you have heard me say before, we had no choice but to make a change.

In a nutshell, the Banking Department came into existence in 1853 (we are the most venerable bank regulator in the Country). 

And over the years we have been "asked" by the State legislature to take on the regulation of industries in addition to depository institutions.

However, we never included those other institutions in our assessments.  (Yes, they pay fees, but all of those go to the general fund of the State - and stay there).

And, now we are at the point where a large part of what we do involves non-depository institutions such as mortgage bankers and brokers, licensed lenders, check cashers, money transmitters, etc.

Just look on our Website at the lists of supervised institutions and you'll see what I mean.

So, we have found it necessary to change the way we assess all those other institutions because historically, 100 percent of our operating budget has been covered by banks.

And one thing that is not common knowledge is that the other institutions make up 90% of our regulated entities.

To say that I was surprised when I learned that our depository institutions were paying for 100 percent of our costs would be true - but I was shocked when I learned that depositories only accounted for 10% of our universe!

And the other 90% was not shouldering any of the Department's budgetary burden.

So we started working on how to equalize this imbalance, over time, so there were no big shocks to anyone's system.

I had hoped that sharing the assessment burden with the licensees would instantly bring your regulatory costs down.

Well, it would have, but for two small events: the departure of HSBC and JPMorgan Chase for federal charters!  30% of our revenue stream - poof, gone.

Two institutions leave, of 3500, and 30% of our revenues go with them.  So in addition to equalizing everyone, we also had to cover this 30% shortfall.

Any rational financial person at this juncture would say - okay - so reduce your costs.

One problem, which illustrates just how much subsidization was going on - is that of the 500 examiners we employ at the BD, only 15 full-time equivalents worked on JP and HSBC.

If any of our chartered or licensed institutions had this kind of financial profile, we would revoke the charter or license immediately. 

Under the new structure, which will be reflected in the bills we send out in February, for the first time ever, all of our licensees will be paying for the services we provide them.

As always, I am happy to talk to any of you about issues and questions you may have about how we generate the revenue to do what the law requires us to do.  I have received specific comments from about half a dozen of you, which I know you have also shared with Mike Smith.

I want to reassure you, as I have him, that I want this new assessment structure to be as equitable and as minimally burdensome for all as possible. We have tried to be as fair as we could, and I look forward to discussing your individual concerns with you directly. And if our methodology can be improved upon, we will do so.

So now, I'd like to move on to the subject of our future.  What do we want to do with all that money you pay us?

I have specific objectives for the Department, some of which - such as our internal restructuring - we have already begun to implement and others that we need to work with you on to explore further.

Supervision of financial services, and indeed the future of the dual banking system, is at a crossroads.

As you well know, the financial services industry has undergone huge changes in a very short period of time. Not only are new products and services coming into play nearly every day, we are also faced with federal regulatory shifts that have changed our landscape - for example preemption, BSA and Patriot Act. Money laundering and SARs.

It's no surprise that we are all striving, if not struggling to keep up with these changes and challenges.  We have a clear mission, and even a clear mandate, but the way forward is a little less clear.

That is why I am reaching out to you - at this critical juncture.   More and more, knowing what you think and need is important to charting our future course. If for no other reason than that New York is the financial services capital of the world.

Last November I met with a number of you to talk about the state charter and the job that we do for you. I wanted a frank answer to the question: "Is the state charter relevant today, given the federal preemption of state laws?"  I was gratified to get a resounding "yes" as an answer.  Even from Hal, of JP Morgan Chase!!!!  He did not go so far as to volunteer to continue paying our assessment, however.

I know the industry and the department share the same view point-and that is the preservation of the dual banking system and particularly the viability of the New York State charter is generally a good thing.

But we have some work to do.

Mike Smith and I have discussed various approaches and strategies, and I know that he has developed an informal working group to pursue a number of different initiatives.  But we are also putting into place an informal task force comprising industry, state legislative and department representatives to explore various initiatives for enhancing and making the state charter more valuable and viable.

I know Mike will represent this association and Brad Rock and Mariel Donath will participate on behalf of the Independent and Community Bankers Associations. I hope that through this task force we will come up with some new ideas we can all support and I would like to start with four.

First, a super Wild Card proposal to be recommended to the Governor and the legislature that will automatically convey federal banking powers to our state chartered banks. If this were to be passed, there would be no intervening regulatory process needed to convey any power or right to state banks that national banks enjoy now or in the future. You would be able to exercise such powers immediately! 

That said, I do need to insert this caveat: the legislation we are proposing gives the Superintendent the right to put conditions on those powers.  In short, there are practices that are allowed in nationally chartered banks that I find reprehensible, and in talking to a lot of you, you agree.

As long as I am Superintendent, state chartered banks will not be permitted to offer payday loans. This is a terrible product from the consumers' point of view, and I think from a safety and soundness perspective, it is not good for the banks either.

Second, and sort of along the same line, I want to explore the creation of a uniform/universal bank charter, which would be available to all banking institutions, no matter what type, that combines all the best features, powers and rights presently enjoyed by the various different types of banking organizations under various jurisdictions.

However, if this is to become reality, the Department will need to develop enhanced supervisory capabilities, banking institutions will need to further enhance internal risk management capabilities, and finally, but no less important, we will both have to work toward enhanced consumer awareness.

With that thought in mind, here are my third and fourth objectives.

The third objective is to provide increased management flexibility to the Banking Department by giving us more control over our resources.

We need to be allowed to determine the internal allocation of funds, and we also need the ability to recruit and retain examiner personnel who have the special skills and expertise required in this increasingly complex - and competitive - world. If we do not get some to relief, we will put ourselves at such a disadvantage that we WILL go out of business.

This will require legislation, and believe me, it's going to be a heavy lift.  So I am looking forward to discussing this proposal with the Governor, the President of the Senate and the Speaker. And with Senator Farley and Assemblywoman Cathy Nolan and their staffs. These are two very able legislators, we are lucky to have them.

We have looked at various models to accomplish this. Some of the ideas we have explored, and which seem promising, include a variation of the public benefit corporation/independent commission or board models. Furthermore, it would also help if we had the ability to partner with adjunct operations that would function as private (but transparent) entities able to provide special expertise and services (such as modernized IT operations) to the Department. 

Finally, the fourth objective.

As the Department moves from the historical regulatory, hands-on control model to the modern supervisory oversight model that we envision - keeping in mind our hope that the banks' will gain the ability to exercise automatically the powers of their federal counterparts - there will be a greatly increased need for consumer protection and education.

While you may be permitted to keep up with your national neighbors in terms of products and services offered, we, as a very concerned public service agency, will be pulling out all the stops to be sure that your customers know everything they need to know about what they are getting themselves into in terms of, say, for example, bounce protection.

This type of disclosure is good for consumers, and it is also good for you!  If you have a product which is better for people, they should know what it involves. The more a customer knows from the outset, the better the personal choices they make.

What I propose is a comprehensive consumer protection awareness program, operated by the Department. We already do some of this, but we need to do more. The trade-off is. the more freedom you have to offer services, the more we need to educate consumers about what those products mean for them.

This program would be funded through the general assessment by the regulated industries. All the regulated industries - not just you.

As I said earlier, we are at a crossroads, and I am not overstating our collective importance to the financial industry or being grandiose when I say: the actions we take today will play a part in determining the shape and make up of our nation's financial system tomorrow.

I want our legacy - and by "our" I mean you bankers and we regulators - to be one that is looked upon with favor.  I want those who follow us to day to say: "Hey. They really thought this through. They really did consider all the options."

Most of all, I'd like to know that regulators and bankers of the future will look at what New York has done - or tried valiantly to do - and say: "Yes. They got it right."

Thank you.