Beyond IndyMac: It's a Crisis of Confidence with Banks in Question
Linda McGlasson
July 21, 2008
Very recently IndyMac became another financial institution to fail this year because of the credit crisis.
Taken over by federal banking regulators, IndyMac, a Pasadena, California-based mortgage lender with $32 billion in assets, was the largest thrift on record to fail and the third-largest bank failure in history. Weeks before the bank's takeover on June 26, New York 's U.S. Senator Charles Schumer sent letters to bank regulatory agencies expressing his concerns about the bank's viability. In the next 11 business days, depositors withdrew more than $1.3 billion from their IndyMac accounts. The Office of Thrift Supervision cited Schumer's letters as the immediate cause of the bank's closing in its announcement on the day the bank closed.
IndyMac's takeover is only one of the symptoms of the tightening credit conditions that have been building at financial institutions since last summer. Earlier this week, the top financial leaders from Treasury and the Federal Reserve testified to legislators about the deteriorated state of the economy, the laundry list of economic casualties and a possible slow recovery. This is coupled with the announcement earlier this year by the Treasury of its plans to revamp how financial institutions would be regulated.
And yet, while institutions struggle with the credit crunch, they can't lose sight of security and regulatory compliance. Just last week, in fact, the head of the Office of the Comptroller of the Currency, which oversees roughly 1,700 banks, told its compliance examiners that they need to stay focused on compliance despite the industry's recent credit issues.
"We simply cannot take our eyes off compliance while we address safety and soundness," said Comptroller of the Currency John C. Dugan, speaking at the OCC Compliance Conference in Orlando , Florida . "We know how to deal with credit issues, and we will work our way through these very difficult problems. What I don't want, though, is to finish dealing with the industry's safety and soundness issues only to find that we've allowed significant compliance problems to develop in their place."
Coupled with this continued need for compliance is the issue of maintaining customer confidence in their financial institution. In order to achieve this, industry experts say, institutions must keep information security at the top of their priorities.
A Matter of Trust
The Federal Deposit Insurance Corporation (FDIC) was named conservator of IndyMac, which was renamed IndyMac Federal Bank. The FDIC says it is watching other institutions that have made similar higher-risk mortgages, and FDIC Chairman Sheila Bair reassured IndyMac's customers that their insured deposits are safe. "IndyMac is only one of 8,494 depository institutions operating throughout the country and represents only 0.2 percent of banking industry assets," Bair says. "The overwhelming majority of banks in this country are safe and sound." The FDIC has tagged 90 institutions—about 1 percent of all those it insures—to be placed on its list of "problem banks."
When the IndyMac takeover by the FDIC is splashed over all news media, other institutions have to consider what their own customers are thinking about their bank, says Larry Ponemon, chairman of the Ponemon Institute, an independent privacy and information security research firm. "It's all about customer trust. When people begin to believe that their bank isn't going to be able to make payments to them, when they begin to believe they're not going to meet their commitments, a domino effect begins to occur," Ponemon says. Other banking organizations should pay heed to IndyMac's example. "IndyMac shows what can happen when consumers begin losing confidence and trust in their primary banking organization," he adds.
Anything the financial industry can to do boost consumer confidence at this time would be a benefit, says Steven Jones, director of information security for Synovus Financial Corporation, a $33-billion bank holding company with 35 banks in the Southeastern U.S. "Trust and confidence are paramount in this industry, and communication is critical to maintaining trust. This IndyMac takeover was a classic run-on-the-bank scenario, but aside from a liquidity crisis, it was a trust and confidence issue foremost."
"The toughest issue to deal with has to be the rebuilding of trust with customers, but I think this can be obtained, in part, through strengthening of controls, and effectively communicating such controls to customers," says Jason Bawcum, vice president of security at Community South Bank in Parsons, Tennessee. "There's no better way to build trust than to tell customers what steps you are doing to build or improve their confidence."
None of this will be easy, he adds, "but should definitely serve as a good starting point." Customer perception is key, especially in a time of economic downturn, says Bawcum. "Although not solely the fault of the financial industry, overall consumer confidence is sinking already," he notes.
As the media chatter about IndyMac raises customers voicing their distrust, and talk turns to people stuffing their mattresses with their money, Ponemon stresses "Anything that an institution can do to not have its trustworthiness diminished in the eyes of its customers is more important than ever before." In monitoring the news coverage of the IndyMac takeover, he repeats "Clearly the biggest issue is that financial institutions have to work even harder now to maintain the trust."
If there was ever a time to behave in ways that are ethical and trustworthy, Ponemon says "It's today. Even for the big banks, small little signals like a privacy breach would be enough of an event to tip the scales to bring about the loss of a lot of customers," he observes. Strong information security policies and procedures are key to preventing a breach, he says.
Outside of the most obvious recommendations of maintaining strong security and communicating with customers, Jones suggests maintaining a healthy relationship with banking regulators. "Make sure there are no surprises," Jones says. "Keep them abreast of risk and risk management activities within your organization."
The FDIC insures deposits in banks and has responsibility for fostering consumer confidence in the banking system. Jones says he believes regulators are also feeling pressure from the current economic situation. "We have historically seen a year over year increase in regulatory scrutiny, but the pace seems to be accelerating."
As the events of the past week at IndyMac begin to settle down and the bank resembles a more normal banking business, the FDIC proves again its ability to restore order, calm and confidence. These are the times when all institutions concerned about maintaining customer confidence need to remind their customers that their institution is sound. Communicate to them of the many regulatory checks and balances in place, that the FDIC or (NCUA for credit unions) ensure the safety of their deposits, and that the trust and confidence confided in your institution is well-placed.
Linda McGlasson is managing editor for CUInfoSecurity. Reprinted with permission.
It’s Simple to Enter the Best Practices Awards; and You Might Win a Free Conference Registration
CUNA OpSS Council
July 15, 2008
Looking for a way to get a free registration to the OpSS Council Annual Conference in Colonial Williamsburg, September 14 – 17, 2008? One possible way is to enter the 2008 OpSS Council Best Practices Awards and have your entry selected as a winner.
It is not as hard as you think. The Awards Committee has simplified the application again this year so that only a minimum of three pages is needed to describe your entry. You can then attach supporting documents if you wish, such as additional narrative or related information describing your entry.
There are four Best Practices categories - a winner is selected in each category. You can enter more than one category if you want to improve your chances of winning.
- Sales & Service Management
- Branch Design
- Call/Contact Center
- Operations Efficiency and Productivity
Winners are required to attend the conference and present a short PowerPoint presentation. Each winning entry (that means you could have four chances to win) will receive a complimentary conference registration valued at $899.
Who has won in the past? What were their presentations like?
> Click here to view them
To find out more about the Best Practice Awards and enter, click here.
But, be sure to act now. The deadline for entries is July 30, 2008.
One-Person Marketing Depts, OpSS Best Practice Award Winners Subjects of Two New White Papers
CUNA Councils
July 15, 2008
Learn ideas for balancing the priorities and workloads of a one-person marketing and business development department in the first of two new white papers from the CUNA Councils.
Sponsored by the CUNA Marketing and Business Development Council, “Balancing Priorities in One-Person Marketing and Business Development Departments” focuses on the advice and experiences of nine credit union professionals who lead these one-person departments. These professionals discuss challenges, specialized tasks, outsourcing, use of technology, personals tools and tips, and how they stay visible in the organization.
This paper also addresses a common issue in one-person departments of finding help or backup in the credit union. One idea provided in the paper is to gain assistance from front-line staff with an interest in business development. “When work was slow at a new branch, a teller at First American CU in Beloit, Wis., asked the credit union to allow her to call small businesses to introduce the credit union and promote the value of direct deposit. That effort eventually developed into a business development position for the teller,” states the paper.
The second new paper, “Strengthening Member Connections: 2007 Best Practices Awards from the CUNA Operations, Sales, and Service Council,” profiles the successful efforts and initial results of the two award-winning credit unions. Ascend FCU in Tullahoma, Tenn., won in the Branch Design category for the design of a new branch that translates into brick and mortar philosophy behind its new name, brand identity, and sales and service culture. Spokane Teachers CU in Liberty Lake, Wash., won in the Sales and Service Management category for its Conversation Engine, a member relationship management tool developed internally to suggest customized “conversation starters” to help front-line staff identify products and services to serve members’ financial needs. The awards – recognizing innovative solutions that optimize credit union performance – were presented during the council’s 10th annual conference in September 2007.
CUNA Council members are entitled to complimentary copies of these white papers; non-members may purchase the white papers for a price of $50 per copy.
The papers are available online in the white paper section of each council site - select the “Marketing and BizDev” tab for the one-person department paper or the “OpSS” tab for the best practice awards paper.