Interim Joint Committee on Banking and Insurance


Minutes of the<MeetNo1> 4th Meeting

of the 2006 Interim


<MeetMDY1> October 19, 2006


The<MeetNo2> 4th meeting of the Interim Joint Committee on Banking and Insurance was held on<Day> Thursday,<MeetMDY2> October 19, 2006, at<MeetTime> 11:00 AM, at the Coldstream Research Campus in Lexington, Kentucky. Senator Tom Buford, Co-Chair, and Representative Jim Bruce, Co-Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Tom Buford, Co-Chair; Representative James E. Bruce, Co-Chair; Senators Julie Denton, Ernie Harris, Richard "Dick" Roeding; Representatives  James R. Comer, Jr., Ron Crimm, Robert R. Damron, Mike Denham, Ted "Teddy" Edmonds, Danny R. Ford, Jim Gooch. Jr., Mike Harmon, Jimmy Higdon, Dennis Horlander, Dennis Keene, Rick W. Rand, Frank Rasche, Steve Riggs, Brandon D. Smith, Tommy Thompson, Ken Upchurch, Ron Weston, and Susan Westrom.


Guests:  Ballard Cassady, Debra Stamper and John Cooper, Kentucky Bankers Association.


LRC Staff:  Greg Freedman and Jamie Griffin.


Senator Tom Buford recognized Kevin Maines with the Lexington Chamber of Commerce.  Mr. Maines welcomed the Committee to Lexington and thanked the Committee for meeting at the Coldstream Center.


Ballard Cassady, President and CEO, Kentucky Bankers Association (KBA),  discussed the immediate shortage of bank examiners at the state level.  He stated that they have met with the Office of Financial Institutions a number of times regarding this issue and the KBA feels the plan of action is just not quick enough and the shortage of examiners is imminent.  He stated that in order to keep state banks sufficiently and efficiently regulated, the state must immediately hire experienced, retired examiners on a three year contract.  The retirees will fill the gap caused by the training period necessary to properly season new hires and can assist directly with the training.  Banking laws are complex and the application of laws within any particular bank scenario requires some level of individual judgment based entirely upon experience.  He stated that while bringing back experienced, retired examiners, the Office of Financial Institutions (OFI) should also hire sufficient numbers of new examiners at the newly proposed salary scales to work with the returning experienced examiners and to provide the industry with enough examiners to maintain the level of safety and soundness that the banking industry in Kentucky has been used to in the past.  He stated that this is neither complicated nor expensive.  The funds are available within the OFI to cover the costs.  He stated that in their discussions with the OFI they have led the KBA to understand that such a hiring scheme would cost the OFI approximately $1 million dollars, which is far less than the over $2 million dollar surplus that the OFI produces each year through various fees and penalties collected from regulated industries.  He stated that with the existing surplus  there is no need for the OFI, as it has previously suggested, to impose what would amount to an increased tax on hometown banks through higher fees.


Mr. Cassady stated that another concern that the KBA has is the growth and aggressiveness of industrial loan companies or ILCs.  ILCs are a specific type of financial services business, which are chartered by the state.  Each state handles ILCs and their regulatory structure differently.  He stated that most states have been historically conservative in the allowance of powers to ILCs because of the concern regarding the mixing of banking and commerce.  While Kentucky has maintained a strong hold on its regulation of ILCs, other states have not.  Kentucky ILCs for instance are allowed to make certain types of loans, but are not allowed to take deposits.  He stated that this is important because a bank is defined by it's ability to both take deposits and make loans.  He stated that other states have not been so careful, some states have allowed ILCs to take deposits and it has opened the door for companies such as Wal-Mart, Home Depot and others to create wholly owned ILCs in the anticipation that they would operate them as banks and branch across the country. He stated that this is reflected in the fact that such companies have filed application for FDIC insurance.  He stated that allowing ILCs to blur the lines between banking and commerce would be risky for the consumer and dangerous for the strength of banking as a whole.  He stated that if FDIC insurance is acquired by ILCs, the giant corporations holding the charters will, and are pushing Washington to set the stage for them to blur the lines even further, by opening up interstate branching laws to allow for reciprocal, open branching.  This would allow these giant corporations to open a branch in each of their retail centers immediately, without any real ties to Kentucky or any other state where they do business.  He stated that currently Kentucky does not allow for de novo branching or even reciprocity.  Kentucky requires that you charter a  bank or merge with an existing bank in Kentucky in order to gain entry for branching purposes.  He stated that there are some Kentucky banks that would like to open de novo branches in border states, but are not allowed to because we do not reciprocate.  He stated that the KBA is currently polling their members on these restrictions, but they are also advising them that reciprocity, under federal law, is required to apply equally to all FDIC insured institutions, including ILCs, if they are granted FDIC coverage.  He stated that any legislation Kentucky would pass would be symbolic, as the current laws are some of the strongest in the country.  But the symbol would be strong and certain.  He stated it would send a message to Washington and to mega companies, seeking to monopolize the financials services industry, that Kentucky will not stand for it.  He stated that this is the kind of message the Committee is known for.


Mr. Cassady stated that the final issue he will discuss is the structure of the governance of the Office of Financial Institutions.  He stated that the financial services and insurance industries are two of the most highly regulated industries in the country.  These two industries affect virtually every citizen of our country, and manage and maintain the majority of their financial resources.  He stated that because of the importance and responsibilities of these industries, these offices should be placed in their own cabinet.  The future of the industry needs to be certain of focused oversight.


Representative Susan Westrom asked how many bank examiners will be leaving as of 2008.


Mr. Cassady stated that it would be approximately 70% of the examiners.


Representative Bob Damron stated that Representative Harry Moberly, Chairman of the Appropriations and Revenue Committee is looking at the retirement/pension issue and there may be a possible extension of the 3 year high salary calculation.


The minutes of the September 11, 2006, were approved.


The meeting adjourned.