Bankers may soon have to think about restructuring existing qualifying special purpose entities, even though the Financial Accounting Standards Board grandfathered those structures, in order to comply with new accounting going ahead.

According to project manager Halsey Bullen, the board’s decision March 10 on guidance to implement the amendment to FAS 125 is similar to Emerging Issues Task Force (EITF) Issue No. 97-6. That issue grandfathered previous transfers to existing structures. Likewise, the new guidance would impose no retroactive accounting changes on existing SPEs. However, Bullen cautioned, existing securities structures to which transfers will be made in future may have to be altered to meet the new accounting requirement.

The guidance will mainly affect revolving period securitizations such as portfolios of credit card loans or home equity loans, Bullen said.

The board will discuss the effective date for the new amendment in a future meeting, possibly March 24. Previously the board had said the amendment would be effective at the end of this year. It recanted, however, because work on the amendment fell behind, and the completed document still must be approved by the board, go through a comment period and the issues must all be reexamined by the board. Bullen said whatever the new effective date, it would provide sufficient to give bankers time to restructure any necessary deals.

The board also limited the necessity of disclosures about characteristics, cash proceeds and gain and loss to securitizations, excluding previously-considered whole-loan sales or loan participations.

Finally, the board reaffirmed its previous stance that auditors and attorneys should make the decision whether sales treatment should be given to securitization deals done by banks subject to FDIC receivership, should the bank declare insolvency.

Princeton Telecom, the electronic lockbox firm that works to concentrate bill payment and remittance information and aspires to be a bill publisher between the billers and aggregators such as Checkfree, will soon announce plans to take its company public.

The 15-year-old company, based in Princeton, N.J., has not yet announced its IPO, but will do so soon, according to Dick Corl, executive vice president. Princeton Telecom is currently one of the best-connected firms in the business, with connections to 700 merchants.

Corl explained the company’s place in the big picture is between billers and a company like Checkfree, which currently has 80% of the bill payment market, and gives banks the bills to pay. Princeton Telecom would publish bills on behalf of billers, send the content to aggregators like Checkfree, which would aggregate the bills on behalf of the banks.

Corl sees a future world where consumers will have several options to pay all their bills, one of which would be a bank’s own Web site, because it would have links to all the major billers through bill publishers like Princeton Telecom and aggregators like Checkfree. Some other options for the consumers to pay their bills would Internet portals like Yahoo! or Infoseek in addition to the biller’s own Web site.

"For the bank, they’re going to want content and the only way they’re going to attract the consumer to Chase.com (for example) to pay the bills is to have a lot of bills. The banks are interested in having as many billers publishing as many bills as quickly as possible until there are a lot of presentments. Otherwise it’s probably not very compelling to the consumer," Corl said.

America’s Community Bankers say they will fight hard this year together with insurers to keep the proposed corporate-owned life insurance tax out of the budget.

Jim O’Connor, tax counsel with the ACB, said at the group’s annual legislation conference in Washington recently that most of the abuses that led to earlier legislation have been eliminated, and further restrictions on deductions for life insurance purchases are not needed.

"We want some closure on this," he said.

The Treasury has proposed this year a repeat of a $1.9 billion tax on corporate-owned and bank-owned life insurance by closing off deductions for employees, officers and directors of the company. The only eligible persons would be those who had a 20% stake or more in the company.

The law was changed in 1996 and 1997 as a result of companies like Wal-Mart using the provision to insure their employees and take large deductions, said O’Connor.

The changes eliminated the ability of companies to borrow against the policies and deduct the interest, he said. FAS 106, which was enacted by the Financial Accounting Standards Board in December 1990 requires financial institutions to estimate their future costs of providing employees health coverage. The COLI provision allows companies to offset some of that hit to capital, O’Connor said.

Last year a $500 million provision nearly made it into the IRS restructuring act but was pulled at the last minute after staffers found a more lucrative compromise. The ACB said they will "stay vigilant" to ensure it doesn’t return this year.

The House Banking Committee rejected a bid by banks to force the thrift industry to pay a deposit insurance differential for three more years, even though legislation was passed in 1996 that would end it at year-end.

A provision extending the differential was included in financial modernization legislation passed by the Senate Banking Committee March 4, but it failed to pass the House Banking Committee March 11 during its markup. A proposal by Rep. Richard Baker, R-La., would have exempted banks with less than $100 million in assets from paying the surcharge imposed on banks, but it was defeated. Under the bill passed in 1996, premiums would be equalized at 2.3 basis points effective Jan. 1, 2010.

The House banking panel voted 29-30 Thursday to reject an amendment that would have eliminated a provision now in the bill that bars chartering of new unitary thrifts and restricts sale of existing ones. An amendment to restore full grandfathering rights to existing institutions passed Thursday 29-26. That provision, proposed by Rep. Kent Bentsen, D-Texas, is comparable to the Senate bill and would allow acquirers of existing unitary thrifts to retain all powers associated with the current charter.

The issue deals with the interest payments on Financing Corporation (FICO) bonds. These were issued in 1987 to finance the bailout of insolvent thrifts. But, the funds provided through the bonds were not nearly enough to bail out the industry, and the whole thrift deposit system was revamped in 1989 when the government assumed the lion’s share of paying for the bailout. However, under the 1989 bill, nearly half of all SAIF premium assessments were diverted to pay the interest on the FICO bonds.

In 1996, given that 40% of thrift deposits were owned by banks, an agreement was reached to reduce the competitive disadvantage thrifts faced in paying premiums of 23 basis points while banks paid 1.25 basis points. The banks agreed to assume some of the burden as of Jan. 1, 2010. But to get banks to do this, thrifts agreed to make extraordinary, one-time payments totaling $4.5 billion, plus pay a disparate premium, albeit reduced, for three more years.

But the issue was reopened several months ago at the request of the American Bankers Association, which argued that under the current deal, Bank Insurance Fund members are being squeezed.

Large banks were able to whittle down a provision of financial modernization legislation being proposed in the House that would have required a public hearing in every city involved in a bank merger for most acquirers– but the victory came at the cost of the goodwill that had previously marked the proceedings.

The provision, approved on March 4 by a 22-21 vote, would have required that the Federal Reserve Board hold a public hearing in all affected cities for mergers involving institutions with $1 billion or more in assets. Steven Blumenthal, an analyst at Schwab Capital Markets and Trading Group in Washington, said virtually all bank mergers involve institutions of $1 billion or more. The amendment was introduced by Rep. Bruce Vento, D-Wis., and was supported by the Democratic members of the committee.

The large banks promoting the legislation "went ballistic," in the words of one lobbyist, and went to Rep. James A. Leach, R-Iowa, chairman of the House Banking Committee, to warn that if the amendment stayed they would back away from supporting the bill.

Their arguments galvanized Leach, who allowed two Republicans to introduce an amendment to give the Fed "discretion" to hold hearings, rather than mandate them. The amendment passed on a partisan vote late March 10, but the fact that the amendment was out of order under committee rules enraged Democratic members of the committee. The tenor of the proceedings grew so intense that Leach called a halt to the markup for the day at the request of Rep. John LaFalce, D-N.Y., ranking minority member of the panel and a key player in facilitating the bipartisanship that marked the proceedings.

Their argument, as explained by the lobbyists for several money center banks, is that holding public hearings adds to the already huge cost of consummating mergers. They said that when all costs are added up, it costs $1 million or more for the institutions involved to put on each hearing, even though they are held under the auspices of the Fed. At the same time, sources said, a merger-in-progress leaves both institutions vulnerable to takeover by other institutions. The longer the merger is in limbo, the greater the uncertainty and risk.

The legislation is called the Financial Services Act of 1999. The bill would make broad changes in banking regulation, including repeal of the Glass-Steagall Act, and would allow banks, securities firms and insurance companies to affiliate. However, the bill has many controversial components because it seeks to give all current players an equal voice in regulating the new institutions.

The House Banking Committee passed legislation March 11 that would repeal the Glass-Steagall Act and allow banks, insurance companies and securities firms to affiliate.

A similar bill was reported out March 4 by the Senate Banking Committee, but the Senate panel’s vote on the measure was more partisan because it would roll back commitments for banks under the Community Reinvestment Act. That bill was passed by an 11-9 vote and was believed to have an uncertain future.

The next step for the House bill is the House Commerce Committee, which is expected to impose much more restrictive rules on bank securities activities than that imposed in the banking panel version of the legislation. Specifically, the Commerce panel, which oversees the Securities and Exchange Commission and the activities of securities firms, is expected to revise the bill to require banks to "push out" their securities activities completely under SEC scrutiny. Commerce is expected to get a one-month referral on the legislation.

The House leadership wants to put the financial modernization bill on the floor the week of May 11. In comments several weeks ago, Rep. David Dreier, R-Calif., chairman of the House Rules Committee, said it is likely he would be in the unenviable position of refereeing between the Banking and Commerce panels’ versions of the bill.

Sen. Phil Gramm, R-Texas, chairman of the Senate panel, has said he hopes to have a bill on the floor the first week of April. However, Gramm appears committed to rolling back banks’ CRA responsibilities, so it is unlikely the bill will get to the floor under such a quick schedule. Indeed, there are doubts that the differences on the Senate bill can be reconciled by summer, at best.

The industry groups which put together the basics of the bill want it to be enacted by the July 4th congressional break. But congressional staffers and administration officials believe that such a fast track is unlikely.

The pattern in both the House and Senate banking proposals is to pass bills containing provisions sought by all lobbying groups, and to pay tribute to functional regulation, which calls for specific activities to be regulated by their current regulators. However, because of the compromises crafted to keep all special-interest groups happy, it is seen as unlikely that the bill will work in practice. Effectively, the bill is likely to lead to endless litigation and conflict between regulators seeking to protect their turf, and the turf of the industries they regulate, sources said.

The Obama Administration has already sent out a veto letter on the Gramm/Republican/Senate version of the bill. Besides CRA, it has controversial provisions such as safe harbors designed to protect current state laws restricting bank insurance sales; a definition of insurance; and the end of deference to federal regulators in determining whether a product is banking or insurance. All of these provisions could prompt a presidential veto.

Under pressure from lawmakers to cooperate, federal banking and securities regulators reached a deal Wednesday that should head off future disputes over excessive loan-loss reserves.

As part of the agreement, the Securities and Exchange Commission said it would not require a bank to restate earnings, even if it believes the institution has inflated reserves or failed to adequately document the size of the fund.

Instead, the agencies said they would work with banks to improve disclosure and documentation of loan-loss reserves. Banks also could be required to cut reserves in future years.

"This is a joint recognition that the best way to address any problem is to do it prospectively," said Kevin Bailey, deputy comptroller for core policy at the Office of the Comptroller of the Currency.

The SEC began cracking down on earnings management last fall. This included delaying SunTrust Banks Inc.’s acquisition of Crestar Financial Corp. until the company agreed to reduce loan-loss reserves by $100

million and restate earnings.

The SunTrust case outraged the industry, which charged that it was unfair for the SEC to punish a bank for holding excessive reserves at the same time banking regulators were urging them to bolster reserves.

Regulators issued a joint statement in November vowing to work more closely on loan-loss provisioning, but industry officials continued to complain about a lack of coordination.

The agreement, which was reached late Wednesday afternoon, also commits the SEC, OCC, Federal Reserve Board, Federal Deposit Insurance Corp., and Office of Thrift Supervision to establishing a joint working group on accounting issues. This group will issue guidelines on how banks should make "reasoned assessments of losses" in their portfolios and how they should document these expected losses, according to the agreement.

The new agreement, however, won rave reviews from industry officials and legislators. Rep. Marge Roukema, chairwoman of the House Banking Committee’s financial institutions subcommittee, was one of several lawmakers who had promised to introduce amendments to the financial reform bill to end the controversy over loan loss reserves. She dropped the amendment, however, after regulators announced the deal.

A group of insurers has moved the ball forward on the important issue of onshore securitization of catastrophic risk, which banks may soon be interested in as investments. But important hurdles remain to be negotiated.

The new instrument may also help banks hedge risk stemming from concentrations of loans that could be adversely affected by a hurricane or other natural disaster.

While approving a draft of a model act designed to allow insurance companies to securitize their risk within the United States, the NAIC Working Group on Securitization stalled on further efforts to bring the concept into reality.

The life insurance industry and other institutions are looking at investing in such arrangements as soon as property and casualty companies get state regulatory approval to do so.

The exposure draft of the model, approved last week at the NAIC’s spring meeting in Washington, D.C., calls for assets to be carried at fair value. It will also require fully active cells and funded dollar-for-dollar transactions within the protective cells, and will ban derivative-based deals–for now.

Jeffrey Alton, chief accountant for CNA Insurance Company, said that under the proposal, insurers will have to file a plan of operation with each insurance department. "It should be very clear to a regulator what exposures preside in those cells." Alton said he did not support the concept that the protected cell should have a separate risk based on a capital charge of 10% that stems from concerns of potential tax liabilities.

CNA has pushed the hardest for quick approval of the catastrophe model so it will be in place by the next hurricane season.

Questions continue to arise over whether the assets contained in the protective cells will be enough to sustain the liabilities. Mike McCarter, vice president of accounting for American International Group, isn’t worried. "These are high quality securities," he said.

The one-stop financial products shop may be the mantra for big banks, and if financial modernization legislation passes, it will be easier for banks to sell a range of new products. Bay View Capital, however, is taking the opposite path: specializing in niches and leaving tricky, thin-margined businesses to the behemoths.

The San Francisco-Bay-area-based Bay View made the conversion from thrift to bank official March 1 with the blessing of the Office of the Comptroller of the Currency, but really the change had begun in third quarter 1995. The principal shareholder at the then-$2.5-billion-asset thrift pushed for a change in management and got it, bringing in Ed Sondker and David Heaberlin, CEO and CFO, respectively.

They went to work boosting the thrift’s transaction accounts, which pay no interest and are thus a free source of funding, to the current 50% of total deposits from 15% when they started. They’re still not satisfied, and have a goal of 60% before the year-end.

The move into transaction accounts was prompted by difficulties faced by the thrift industry in California. Heaberlin said Bay View was confronting low yields on assets and high costs for deposits–a trend the Office of Thrift Supervision ranked as most severe in the 11th District. The thrift was trying hard to stay above water in the competitive mortgage loan market of California, and finding it tough sledding in a landscape littered with the likes of BankAmerica and North American Mortgage Corp. That prompted the new management to rework the lender’s strategy.

"We began on restructuring deposits products, focusing away from CDs and onto checking accounts and money markets and savings accounts. We’re not interested in single-source accounts. What we really focused on is relationship banking, moving away from hot money, high-cost-of-funds, which is how many thrifts do it," Heaberlin said. He said the bank has reduced its CD exposure by $800 million since the new management team came and grown transaction accounts to about $1 billion. The total asset size of the company has grown to $5.6 billion from $2.5 billion, mostly through acquisitions including the purchase of Bay-area EurekaBank in January 1998, which doubled the company’s size in total deposits. At year-end, the total deposit base weighed in at $3.3 billion and transaction accounts at $1.6 billion. That compares to $2 billion in deposits and $300 million in transaction accounts before the changes.

With the Eureka acquisition, Bay View became the largest deposit franchise focusing on the Bay area exclusively. While that may seem a technical distinction, Heaberlin noted it has helped Bay View differentiate itself from massive neighboring competitors.

"It really puts us in a nice competitive position. With all the consolidation in California, people are always going to feel disenfranchised. It gives you marketing opportunities if people want to bank locally rather than with BankAmerica/NationsBank, Wells Fargo," he said.

In addition to boosting transaction accounts to a level Heaberlin calls "credible," the duo worked to get Bay View out of the mortgage origination business in short order.

"We began focusing on other areas we could originate assets without competitive barriers to bring home superior risk-adjusted yields to what we could get from traditional (methods)," he said. The company found success by acquiring auto and commercial business originators, he said.

"When you combine these new higher risk-adjusted yield assets with dramatically lower deposit costs now, that’s led to increase in profitability measured by net interest income. We started at 160 basis points, we’re up to 300," he said. He predicted that his company’s switch to a bank charter from a thrift would not be the last large charter conversion in the area, noting the difficulty in operating in the traditional mortgage market, which he described as "completely commoditized" and very tough to compete in "unless you’re a Wammu (Washington Mutual)."

Heaberlin said the management continues to look "aggressively" for acquisition opportunities, and the primary focus is on the asset-origination side.

The company has a securities subsidiary, MoneyCare, with between $700 and $800 million under management, that is a part of the depository group at the bank. Bay View has streamlined what was a multi-subsidiary corporate structure into one that consolidates all of its activities under the bank. The bank’s consumer lending group is called Bay View Acceptance Group, and the commercial side is called Bay View Commercial Finance Group. Heaberlin said although the company offers customers some insurance products through the securities firm, and is in the process of offering more, the bank is not going to rush into the insurance fray.

"We have the fourth largest metro area in the U.S., the highest percapita-income area–there’s so much to be accomplished. We’re trying to put the basics of commercial banking in place, so insurance is not as much of a priority. But we are interested in getting into that in the future."

The company announced just last week that its stock will move to the New York Stock Exchange from the Nasdaq, signaling what it hopes will be perceived as a move up in the banking world.

Financial consolidation and new technology spell a "bright" future for banks in the 21st century. The banks, however, also will face challenges– especially with the current version of financial modernization legislation as well as in building a brand, said former Comptroller of the Currency Eugene Ludwig.

He also warned that banks must stay in tune with regulation and legislation. "If H.R. 10 goes through in a form that gives banks an economic disadvantage, it could throw banks back eight years," he said. "You just can’t take the legislation for granted."

Ludwig explained, "Banking is going through a revolution, and you can’t overstate that revolution. In the next century (the banking industry) will be unrecognizable."

Three powerful forces will shape the banking industry in the next century–information technology, communication technology and globalization, he said.

Ludwig, who is now vice chairman of Bankers Trust, made his comments at the Bank Securities Association’s 12th Annual Convention in Palm Springs, Calif., last week.

Branding will be of the utmost importance in the 21st century because two types of customers will exist: "commodity and non-commodity," Ludwig said. Commodity shoppers will surf the World Wide Web and be well versed in every product.

But the non-commodity shopper–the dominant market player–will be the busy customer who wants one-stop shopping. "They will look for a trusted brand," Ludwig said.

Along with the challenge of branding comes the integration of products, Ludwig said. "We are not going to be living in a world where mutual funds, insurance or securities will mean anything" to the customer, he said. The product’s "functionality" and profit return will be key to the customer. The customer will be more concerned about an investment’s return than with the type of investment product, he said.

The current financial modernization legislation "boxes" everything into separate products, Ludwig said. But "hybrid products are the future."

If banking is about information technology, then how the customer interacts with that technology is also important, he said.

The shrinking globe and the changing tastes for new products will push banks to become even more technology savvy, Ludwig said. "Banking will become ever less physical and ever more technological."

Banking will be about "innovation and creativity and less about tradition," he continued. Banking has evolved very slowly until recently, he added, but "in the future, banking will be about speed and change."

And the future for small banks is also bright, Ludwig said. Small banks that are technologically savvy will be able to maintain a competitive edge over larger banks.

"If a small bank is technologically sophisticated it can sell its products all over the world," he said. Technology will become cheaper and third-party marketers will be able to provide these services for a cheaper price, he said.

The banking industry will not take on the expected "bar bell" form– with a huge disparity between small and large banks, Ludwig said. Rather, "Small institutions will be able to use technology to compete."

But just as increased opportunity for banks will abound in the new millennium, more risks will also surface. "In the 21st century it will be more volatile risk" due to the tremendous convergence of information and changes in connectivity, he said.

"The successful bank will take advantage of new opportunities, but maintain traditional integrity," Ludwig said. "The new world of banking is bright."