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Potential Opportunities for Cost Sharing by Community Banks

At the North Carolina Bankers Association's Annual Convention today, Kris Kiefer, Deputy Comptroller at the OCC, and John Henrie, Regional Director of the FDIC, referenced a recent OCC paper regarding bank pooling of resources to obtain better services at lower cost. 

The paper, titled “An Opportunity for Community Banks: Working Together Collaboratively,” describes ways in which community banks might collaborate to lower costs and obtain specialized expertise. The paper outlines how community banks can structure cooperative arrangements, and emphasizes the need for effective oversight of those arrangements.

Community banks can collaborate in several ways, according to the OCC, such as:
  • exchanging information and ideas;
  • jointly purchasing materials or services;
  • sharing back-office or other services;
  • sharing a specialized staff member or team;
  • jointly owning a service organization;
  • participating in disaster mitigation agreements; and
  • jointly providing/developing products and services.
In some cases, community banks will want to form an entity (such as an LLC) to engage in activies. The regulatory issues to be addressed in those situations will be whether the activities are permissible and whether the investment by the banks in the entity are permitted.  The OCC has its own rules and guidance for permissible activies, and has published guidance based on prior decisions.  State chartered banks may generally follow those rules and guidance, despite being regulated by other agencies.  Often the entities will be considered "noncontrolling investments" or "bank service companies," which are different from a regulatory standpoint than the "bank operating subsidiaries" that many banks may be more familiar with.  Often an application will be required.

As with loan participations and syndications, the guidance makes clear that bank collaborations should be documented in a binding agreement that allocates the resposibilities and risks associated with the activity. 

Ideally, collaboration in areas in which it makes sense would enable community banks to achieve better outcomes at lower costs, increase their range of services, and enhance the expertise available to them.


 





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