Legislative Briefing

1. House Financial Institutions Committee Legislative Briefing Texas Department of Banking Testimony of: Randall S. James – Commissioner February 12, 2007

2. 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, Trust Companies and Offices of Foreign Bank Agencies • 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 interest of depositors, creditors, shareholders, participants and participant-transferees. • 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 interest of clients, 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. Legislative Briefing

3. Statutory Mandates (cont.) • Prepaid Funeral Contract Sellers, Perpetual Care Cemeteries, Money Service Businesses, 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 151 of the Texas Finance Code (Money Services Act) requires that the Banking Commissioner examine each money service business (currency exchange, transportation, transmission, stored value cards, and third party bill payers) annually 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. Legislative Briefing

4. Profile of Regulated Entities Information as of September 2006. * Does not include 17 out-of-state, state-chartered banks operating in Texas ($16 billion). Legislative Briefing

5. Legislative Briefing

6. 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. Larger and more complex banks also necessitate a better trained and experienced staff of examiners, including more subject matter specialists, to review their operations. • [1] Does not include out-of-state, state-chartered banks operating in Texas. • [2] Includes Bank and Trust field examiners and related directors. Legislative Briefing

7. Industry Issues Affecting the Agency  Entity supervision continues to increase in scope and complexity.  Bank and Trust Supervision – Increased supervision is occurring in: (i) anti-terrorist and money laundering detection; (ii) strengthening corporate governance practices; (iii) credit underwriting; and (iv) interest rate risk analysis. Other factors that influence the level of required supervisory resources include: •  Increased competition resulting from branch expansion, mergers and acquisitions, de novo charters, and non-bank activities. •  Evolution of the industry into a greater diversity of financial products. •  Protection of consumer interests and privacy and preventing identity theft and abusive practices. • Advancements in technology. • Positive economic indicators. Legislative Briefing

8. Industry Issues Affecting the Agency (cont.) Special Audits – (Prepaid Funeral Contract Providers, Perpetual Care Cemeteries, and Money Service Businesses) •  Evolving methods of transferring funds. •  Identifying and prosecuting unlicensed activities. •  Industry investments into riskier instruments. •  Money service business bonding is becoming increasingly more difficult to acquire. •  Compliance with anti-money laundering laws, including the Bank Secrecy Act. • Migration of prepaid trust contracts to insurance funded arrangements. Legislative Briefing

9. Proposed Legislation  Improvements to the Texas Finance Code – Proposed bill to: •  Improved Regulatory Oversight; •  Enhanced Corporate Application Process; and •  Correct technical errors. Legislative Briefing

10. Proposed Legislation (cont.)  The Department stands ready to act as a resource outlet to state leadership on these other issues expected to be considered this legislative session. •  Banking issues •  Identity theft • Preemption of state law by federal authorities •  Usury •  Wire transfer fees Legislative Briefing