1. House Committee on Pensions, Investments & Financial Service Texas Department of Banking Banking Commissioner Charles G. Cooper March 4, 2009 Legislative Briefing

2. Department Oversight Offered by: Texas Department of Banking March 2009 2  Established in 1905 by the 29th Legislature.  Rich tradition of professional and sound regulation.  Practices and promotes fiscal responsibility.  Reduces regulatory burden by coordinating regulatory activities with other state and federal agencies.  Our mission is to ensure Texas has a safe, sound and competitive financial services system.  Regulatory oversight in the banking and other financial services industries is countercyclical, and during times of economic stress additional resources are needed for vigilance, off-site monitoring, and onsite supervision.  Continuous development of examination skills is crucial to the agency’s ability to respond to rapid fluctuations in the financial services industry.

3. Statutory Mandates 3 Banks, Trust Companies, Foreign Bank Agencies and Check Verification Companies:  Chapter 31 of the Texas Finance Code requires the Banking Commissioner to examine each state bank annually or on another periodic basis the Banking Commissioner considers necessary to safeguard the interest of depositors, creditors, shareholders, participants and participant transferees.  Chapter 181 of the Texas Finance Code requires the Banking Commissioner to examine each state trust company annually or more often as the Banking Commissioner considers necessary to safeguard the interest of clients, creditors, shareholders, participants and participant-transferees.  Chapter 204 of the Texas Finance Code requires the Banking Commissioner to examine each Texas state branch, agency or representative office of a foreign bank annually or more often as the Banking Commissioner considers necessary to determine if the office is operated in a safe and sound manner.  Section 11.309 of the Texas Finance Code requires the Banking Commissioner to register check verification entities and operate a secure electronic system to facilitate notification of closed bank accounts subject to fraud. Offered by: Texas Department of Banking March 2009

4. Statutory Mandates … Continued Offered by: Texas Department of Banking March 2009 4 Prepaid Funeral Contract Sellers, Perpetual Care Cemeteries, Money Service Businesses and Private Child Support Enforcement Agencies:  Chapter 154 of the Texas Finance Code requires that the Banking Commissioner examine each prepaid funeral contract seller annually or more often as deemed necessary to protect the prepaid funds and to assure that the contracted services and merchandise are provided at the time of death.  Chapter 712 of the Texas Health and Safety Code requires that the Banking Commissioner examine each perpetual care cemetery annually or more often as deemed necessary to protect and safeguard the perpetual care trust funds and to assure that the fund income is used to maintain and support cemetery maintenance.  Chapter 151 of the Texas Finance Code (Money Services Act) requires that the Banking Commissioner examine each money service business (currency exchange, transportation, transmission, stored value cards, and third party bill payers) annually to protect and safeguard customer funds and prevent money laundering and funding of terrorist activities.  Chapter 396 of the Texas Finance Code requires the Banking Commissioner to monitor private child support enforcement agencies through registration and investigation of consumer complaints.

5. Profile of Regulated Entities Offered by: Texas Department of Banking March 2009 5 Regulated EntityNumber of Entities Total Assets $(billions) Commercial Banks*327$165 Foreign Bank Agencies10$ 57 Public Trust Companies21$ 27 Prepaid Funeral Licensees412$ 3 Perpetual Care Cemeteries243$ 0 Money Service Businesses124$ 75 Private Child Support Enforcement Agencies 12N/A Check Verification Entities6N/A Totals1,155$327 Information as of December 2008. * Does not include 23 out-of-state, state-chartered banks operating in Texas ($28,108 million)

6. Federally Insured Depository Institutions Assets Under Supervision in Texas $725.2 Billion 6 Offered by: Texas Department of Banking March 2009

7. Supervisory Information 7 Offered by: Texas Department of Banking March 2009  The total number of state-chartered banking organizations has declined.  Most of this reduction is the result of merger activity. As a result, the surviving banks are substantially larger in size and operate many more branch locations. As the size of the organization increases, so does the complexity of its operations. Larger banks engage in more sophisticated investment ventures and provide a greater variety of products and services to their customers.  Even though the number of banking organizations has decreased, the assets and branches have increased, and agency resources needed to appropriately supervise these businesses have not diminished. Larger and more complex banks also necessitate a better trained and experienced staff of examiners, including more subject matter specialists, to review their operations. BANK INFORMATION 12-31-0312-31-08 Percent Increase / (Decrease) Number of Texas State- Chartered Banks [1] 337327(3%) Number of Branches of Texas State-Chartered Banks 1,0181,97894% Total Assets of Texas State-Chartered Banks $61 billion $165 billion 170% Average Assets Per Bank$181 million $505 million 179% STAFFING INFORMATION 12-31-0312-31-08 Percent Increase / (Decrease) Total Authorized FTEs15918013% Total Authorized Financial Examiners [2] 8610421% [1] Does not include out-of-state, state-chartered banks operating in Texas. [2] Includes Bank and Trust field examiners and related directors.

8. Issues Affecting the Agency 8 Offered by: Texas Department of Banking March 2009 Bank and Trust Supervision - Turmoil in the Financial Sector  The Texas economy has been resilient, however, we are starting to feel the effects of the national economic slowdown that has developed into a global financial crisis.  Leading economic indicators reflect that the financial stagnation will not be as severe in Texas as in other states. But, we are mindful of the deteriorating national economic conditions and the impact it has on our communities.  To ensure Texas has a safe, sound and competitive financial services system, the Department has increased supervision of our regulated financial institutions. Results of Turmoil: Problem Banks  Regulatory oversight in the banking industry is countercyclical, and during times of economic stress there is an increased need for supervision.  Problem banks require experienced examiners that can adequately identify excessive risks like weak lending practices that may further deteriorate an institution’s financial condition.  Problem banks receive more frequent examinations, usually every six months.  Problem banks increase the number of examination hours by approximately 56% due to the expanded work procedures in high risk areas.  Problem banks require continuous monitoring for compliance with administrative and enforcement actions.

9. Issues Affecting the Agency 9 Offered by: Texas Department of Banking March 2009  Evolving methods of transferring funds.  Identifying and prosecuting unlicensed activities.  Industry investments into riskier instruments.  Money service business bonding is becoming increasingly more difficult to acquire.  Compliance with anti-money laundering laws, including the Bank Secrecy Act. Special Audits - (Prepaid Funeral Contract Providers, Perpetual Care Cemeteries, and Money Services Businesses)

10. Proposed Legislation 10 Offered by: Texas Department of Banking March 2009 Major Proposed Changes to Finance Code Chapter 154 – based on House Committee on Financial Institutions interim study. Prepaid Funeral Contract Benefits  Adds new licensing requirements to enhance the viability and sustainability of the licensee’s business over the longer term. Sale of a prepaid funeral contract creates a continuing duty for the seller that can extend 10 years into the future or more.  Expands coverage of the prepaid funeral contract guaranty fund to insurance- funded contracts to address costs not covered by the insurance guaranty association.  Recognizes the responsibility of the funeral provider to protect nonpublic personal financial and health information, perform the contracted funeral, maintain appropriate records, and make the record available to the licensee and the Department.  Expands required disclosures to potential purchasers.  Adds insurance policy disclosure requirements.  Allows non-guaranteed cash advance items to be included in prepaid funeral contracts.  Enhances enforcement authority to permit immediate action in an emergency.

11. Agency Staffing By Strategy 11 Offered by: Texas Department of Banking March 2009 STRATEGY STAFFING LEVELS [1] Financial Examiners, Program Administrators and Related Directors OtherTotal Bank Examination1018109 Comerica Bank Examination11213 Non-Bank Examination15419 Application Processing527 Administration 25 Regulatory Oversight 11 TOTALS13242174 TURNOVER [2] Fiscal Year 200810.9%22.5%13.6% Fiscal Year 20079.4%14.6%10.8% Fiscal Year 200614.0%19.0%15.8% Fiscal Year 200521.2%16.3%20.9% Fiscal Year 200412.0%22.5%14.4% Fiscal Year 20038.8%14.3%10.2% Fiscal Year 200212.0%22.5%14.1% Fiscal Year 200121.7%20.0%21.0% [1] Represents actual staffing as of 2/1//09. [2] Including interagency transfers.