Md. examiners no match for Allfirst burden

After bank shifted to state charter, work of regulators doubled

Staff expertise fell short

March 05, 2002|By William Patalon III | William Patalon III,SUN STAFF

The state of Maryland's last line of defense against bank fraud is overmatched and understaffed to catch a scheme such as the one that hid hundreds of millions of dollars in losses at Allfirst Financial Inc. for more than half a decade, banking experts say.

Mary Louise Preis, Maryland's commissioner of financial regulation, and others warned of an examiner shortage five years ago as the number of state-chartered banks - including Allfirst - began to sharply increase. But after a quick fix, the number of examiners needed to police those banks has declined.

As a result, the state has imposed a temporary moratorium on new bank charters.

The problem, though, is not limited to staffing, according to industry experts. They say Maryland's regulators are no match for sophisticated and complex transactions such as foreign currency trading, which is at the root of the Allfirst scandal.

"Can they adequately examine those institutions and satisfy themselves that something isn't amok? You can't," said Boris F. Melnikoff, a banking consultant and bank fraud expert in Atlanta.

"I think this all raises an interesting question," added Bert Ely, a banking analyst in Alexandria, Va. "Should a state department, with a relatively small staff and staff retention problems, take on something like this?"

It was Allfirst's decision in 1998 to switch from a nationally chartered bank to a state charter that immediately thrust Maryland's regulators into a crisis.

The bank was by far the largest the state regulated, with more than $17 billion in assets - almost equal to the combined assets of the other chartered financial institutions. And Allfirst was also the most complex, trading in arcane and exotic securities such as foreign currency derivatives.

"There is no hiding or denying that this [Allfirst's conversion] brings certain responsibilities to the state that could not be met immediately," Preis said when she took the job shortly after Allfirst made its switch.

Maryland would share regulatory oversight with the Federal Reserve, and the bank's annual examinations would be performed by both state and federal examiners. Still, state officials knew they were outgunned. A five-year plan was enacted to bulk up the Division of Financial Regulation.

Bank examiners were a central part of that plan. When Allfirst announced its intention to convert, the state had nine examiners. During the next year, that number jumped to 19, and the state hoped to add still more. But they needed grooming, too, which comes by first watching, and then helping with, bank examinations.

"It's not just numbers - it's experience," said Preis. "That's why it takes five years" for a fledgling bank examiner to become a seasoned veteran.

While Maryland hired the examiners it believed were necessary, it couldn't keep them.

Industry experts say the demand for experienced bank examiners is keen. The competition among state and federal regulatory agencies is so fierce that Maryland recently lost five, dropping to 14. The Glendening administration froze those openings.

Despite the Allfirst scandal, there have been no discussions about adding money for bank regulators, said Michael Morrill, a spokesman for the governor.

While 14 bank examiners isn't enough, neither is 19, industry experts insist. They back the department's goal of reaching no fewer than 23 examiners.

When the Federal Reserve conducts a yearly "safety and soundness" review of a bank with between $5 billion and $20 billion, it sends in at least 20 bank examiners - more than Maryland's entire roster of bank examiners.

"Every bank is different," said Marsha Shuler, a spokeswoman for the Federal Reserve of Richmond. "But we would typically have upward of 20 Fed examiners on site. It could be even more."

John P. O'Connor, secretary of the state Department of Labor, Licensing and Regulation, warned a House committee last week: "We have the barest-bones organization in the state of Maryland. Anything that gets cut from our budget will result in cutting services." Banking regulation is a key function of the DLLR.

Preis said the state has enacted a temporary halt to issuing state bank charters, and it might be forced to abdicate some of its regulatory responsibilities to the federal government unless Maryland gets more bank examiners.

"Let's make this plain," Preis said. "If we don't get back to 19 examiners ... we'll have to do some serious strategizing. We might have to look at our partners at the FDIC or Federal Reserve ... and see if we can assign fewer people, and they can provide more. But that's not in our plans."

It's not only numbers that matter. Expertise is equally important when it comes to probing and understanding complicated financial instruments such as currency trading.

Federal bank examiners are trained in those fields and see them daily, said Kathryn E. Dick, director of treasury and market risk for the Comptroller of the Currency.

In Maryland, though, Allfirst is the only state-chartered bank with a trading operation. That places the state's examiners at a significant disadvantage. Unlike their federal counterparts, who evaluate currency trading every day, Maryland's regulators see it once a year.

"What I've found for the most part is that state examiners are much less experienced and much less technically competent than the Federal Reserve," said a local banking executive who asked not to be identified.

Staff writers Bill Atkinson and Howard Libit contributed to this article.

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