Senate Finance Committee Budget Hearing Texas Department of Banking Testimony of: Randall S. James – Commissioner January 25, 2005

Offered by: Texas Department of Banking January 25, 2005 Budget Hearing Page 2  Exceptional item requests related to an increase in the examination staff and an increase in consumer assistance personnel are important and needed. This will allow the agency to maintain an adequate level of supervision to meet regulatory responsibilities and performance measures. Important Enhancement Requests to SB1  Seven additional financial examiner positions are necessary to:  Assess compliance with the Bank Secrecy Act and USA Patriot Act, which is critical to detecting and preventing terrorist and money laundering activities.  Analyze the risks from capital markets, information technology systems, bank fraud, and bank holding companies and affiliate issues to ensure the safety and soundness of entities under our supervision.  Perform additional evaluations of external audits, internal controls, conflicts of interest and financial reporting to determine the adequacy of corporate governance practices.  Due to increased awareness of our agency’s services, more consumers are contacting the Department looking for help in resolving problems. An additional consumer assistance specialist is needed to ensure that consumers receive timely and accurate responses to inquiries and complaints.  The Department is fully self-funding and fully self-leveling. The agency neither provides to, nor takes funds from the General Revenue Fund.

Offered by: Texas Department of Banking January 25, 2005 Budget Hearing Page 3  The regulatory response contingency rider needs modification. This rider provides a mechanism to request additional appropriations and staff if certain events occur in the banking industry. We are working on proposed language to improve the utility of this rider. Important Enhancement Requests to SB1  The agency needs to be able to respond quickly to changing conditions in the industry.  Greater flexibility is needed to regulate the financial services industry and to respond to changing economic conditions. This reduces the systemic risk within the industry and protects the public.  The USA Patriot and Sarbanes-Oxley Acts introduced new requirements on financial institutions. In addition, identity theft, breaches of consumer privacy, and cyber attacks pose significant risks to the financial services industry. All of these issues require the expenditure of additional resources by the agency but were not contemplated in the original language of the rider.

Offered by: Texas Department of Banking January 25, 2005 Budget Hearing Page 4 Supervisory Information The total number of state-chartered banking organizations has declined. Most of this reduction is the result of merger activity. As a result, the surviving banks are substantially larger in size and operate many more branch locations. As the size of the organization increases, so does the complexity of its operations. Larger banks engage in more sophisticated investment ventures and provide a greater variety of products and services to their customers. Even though the number of banking organizations has decreased, the assets and branches have increased, and agency resources needed to appropriately supervise these businesses have not diminished at a commensurate rate. Larger and more complex banks also necessitate a better trained and experienced staff of examiners to review their operations. [1] Does not include out-of-state chartered banks operating in Texas. [2] Includes Bank and Trust field examiners and related directors. BANK INFORMATION Percent Increase / (Decrease) Number of Texas State-Chartered Banks [1] (43%) Number of Branches of Texas State- Chartered Banks 4671,158148% Total Assets of Texas State-Chartered Banks $45 billion$68 billion51% Average Assets Per Bank $78 million$205 million163% STAFFING INFORMATION Percent Increase / (Decrease) Total Agency Staffing Level (29%) Number of Financial Examiners [2] 14090(36%)

Offered by: Texas Department of Banking January 25, 2005 Budget Hearing Page 5 Consumer Assistance Information At the suggestion of the Sunset Advisory Commission, legislation was approved that requires our supervised entities to provide their customers with information about how to contact the Department in the event of a problem. Consumers are contacting the agency looking for help in resolving problems with institutions or seeking answers to financial questions. The need has outstripped the available resources, and additional staffing is needed. While only 730 of the 3,423 complaints and inquiries in 2004 related to Texas bank and trust companies, staff still assisted consumers who had problems with other financial service providers.

Offered by: Texas Department of Banking January 25, 2005 Budget Hearing Page 6 Statutory Mandates  The Department of Banking is entrusted with insuring the safety of the public’s money held by institutions that provide financial services. We charter and/or license the following businesses:  Banks  Chapter 31 of the Texas Finance Code requires the Banking Commissioner to examine each state bank annually or more often as the Banking Commissioner considers necessary to safeguard the interests of depositors, creditors, shareholders, participants and participant- transferees.  Chapter 204 of the Texas Finance Code requires the Banking Commissioner to examine each Texas state branch, agency or representative office of a foreign bank annually or more often as the Banking Commissioner considers necessary to determine if the office is operated in a safe and sound manner.  Offices of Foreign Bank Agencies  Chapter 181 of the Texas Finance Code requires the Banking Commissioner to examine each state trust company annually or more often as the Banking Commissioner considers necessary to safeguard the interests of clients, creditors, shareholders, participants and participant-transferees.  Trust Companies

Offered by: Texas Department of Banking January 25, 2005 Budget Hearing Page 7 Statutory Mandates  Prepaid Funeral Contract Sellers, Perpetual Care Cemeteries, Currency Exchange Businesses, Sale of Check Licensees, and Private Child Support Enforcement Agencies  Chapter 154 of the Texas Finance Code requires that the Banking Commissioner examine each prepaid funeral contract seller annually or more often as deemed necessary to protect the prepaid funds and to assure that the contracted services and merchandise are provided at the time of death.  Chapter 712 of the Texas Health and Safety Code requires that the Banking Commissioner examine each perpetual care cemetery annually or more often as deemed necessary to protect and safeguard the perpetual care trust funds and to assure that the fund income is used to maintain and support cemetery maintenance.  Chapter 153 of the Texas Finance Code requires that the Banking Commissioner examine each currency exchange, transportation and transmission licensee annually to protect and safeguard customer funds and prevent money laundering and funding of terrorist activities.  Chapter 152 of the Texas Finance Code requires that the Banking Commissioner examine each sale of check licensee annually or more often as deemed necessary to protect and safeguard customer funds and prevent money laundering and funding of terrorist activities.  Chapter 396 of the Texas Finance Code requires the Banking Commissioner to monitor private child support enforcement agencies through registration and investigation of consumer complaints.

Offered by: Texas Department of Banking January 25, 2005 Budget Hearing Page 8 Profile of Regulated Entities Information as of September 30, * Includes (13) out-of-state state chartered banks operating in Texas with $13.5 billion in total assets.

Offered by: Texas Department of Banking January 25, 2005 Budget Hearing Page 9 Department Staffing by Strategy STRATEGY STAFFING LEVELS [1] Financial Examiners, Program Administrators and Related Directors Other Total Bank Examination Non-Bank Examination Application Processing 426 Administration 26 Regulatory Oversight 11 TOTALS TURNOVER Fiscal Year %22.5%14.2% Fiscal Year %14.9%10.5% Fiscal Year %20.0%14.6% Fiscal Year %20.0%21.0% [1] Represents actual staffing as of