Volume 8; No. 3; Summer 1996
The CRA Strategic Plan Option: Should We Bother?
by Michael Miller, Vice President and Compliance Officer, Silicon
We have all heard examiners and consultants espouse the virtues of the
Strategic Plan, but why should we consider the Strategic Plan Option (SPO)
as a method for measuring compliance with the Community Reinvestment Act?
What factors need to be considered in choosing the best method of measuring
compliance with the CRA? I have asked myself and others these questions
many times, and the answers vary widely. Banker's reactions to the SPO,
and whether to consider it, have become almost comical. They include "You
must be crazy," "It's too expensive to develop a Plan,"
and "Publicly stating our lending goals for our competitors to see?
Allowing public comment on our goals? No way!"
Examiners and consultants, on the other hand, are consistent in their
support of the SPO. Some examiners "sell" the SPO like used
car salesmen. Whether it is the right car for us is not their concern.
Others take a more helpful approach, presenting the benefits of the SPO
and acknowledging that it is not the right choice for every bank. Since
the release of the new CRA examination guidelines, examiners have presented
the SPO as an opportunity for banks to: (1) design their own CRA test;
(2) remove examination uncertainty; and (3) remove or reduce examiner
Many consultants understand the huge undertaking necessary to develop
a CRA Strategic Plan and will help an institution evaluate whether the
Plan is a viable option and whether it is appropriate for that institution.
Others are less thoughtful in their analysis, and simply recommend the
SPO without a solid review of whether the SPO is the best choice for the
So whats a bank to do? Who do we listen to? I say listen to everyone.
They are all correct. The SPO is a choice worthy of consideration. This
view is based on a number of factors, including the information presented
by examiners, consultants and bankers, and our situation at Silicon Valley
I strongly disagree with anyone who believes that satisfactory performance
under the old examination guidelines means satisfactory performance under
the new guidelines. This opinion equates effort with results. While there
is usually a relationship between effort and results, it is not absolute.
The old guidelines required that, among other things, we ascertain the
credit needs of our delineated community. The new regulation is performance-based,
measuring how well we meet those needs, a totally different measurement
of performance. However, it seems likely that if your bank did not perform
well under the old guidelines it will not perform well under the Large
Retail Bank test.... unless you are extremely lucky.
I have also heard people say that banks no longer need to ascertain credit
needs. This is absolutely not the case. These people may have a naive
view of what it takes to run a successful business. We must continue to
ascertain needs. How can any bank be responsive to credit needs without
knowing what they are? It is true, however, that we no longer need to
document our ascertainment efforts.
Finally, I must also disagree with those who believe that the CRA compliance
burden has been significantly reduced with the changes in the examination
procedures. While it is true that we no longer need to document our every
"CRA activity" and contact, we do need to increase our record
keeping and loan tracking. This record keeping is necessary to meet the
new data reporting requirements of the regulation and to periodically
measure performance. Because the new guidelines require data collection
and reporting, they appear to reduce examiner discretion; they also provide
banks with an increased opportunity for self assessment. However, until
we have gone a few rounds under the new guidelines and resolved most of
the open questions (such as what constitutes a "substantial majority"),
self evaluation will not be an exact science. Additionally, banks may
want to record and analyze data regarding loans that are not reportable
in order to uncover all loans that meet the stated goals of the CRA.
These reactions and opinions, combined with the products and services
offered by SVB are the basis for my view of the SPO. SVB serves emerging
and middle-market growth companies in specific targeted niches. SVB is
committed to its focus on technology and life science industries, while
identifying and capitalizing on opportunities to serve other groups of
clients with unique financial needs. SVB provides the majority of its
clients with cash management, international trade, factoring, asset-based
finance and other services designed to meet their changing needs as they
progress through their business life cycle.
While the SPO is a choice worthy of consideration, I recognize that it
is not the correct choice for every bank. So what bank is the SPO designed
for? The first question each bank must ask is no surprise: "How will
we fare under the standard Large Retail Bank test?" If your answer
is clearly satisfactory or better, the SPO is not for your bank. No bank
should go to the extra trouble and expense of preparing a strategic plan
if its CRA record can stand on its own. How can you come to the conclusion
that your bank's performance under the new examination procedures will
be considered clearly satisfactory by your compliance examiner? Self evaluation
against the new procedures, that's how. An accurate self evaluation may
be difficult, however, because the examination guidelines are new and
untested, and because the guidelines provide as many questions as they
Performance under the Lending Test may be measured, at least in part,
by analyzing the percentage of loans your bank has made in its assessment
area (which may or may not be the same as your delineated community),
including small business loans. This may be difficult for those banks
that do not geo-code their non-HMDA reportable loans. Also, while most
banks obtain revenue information during the commercial credit application
process, many banks do not have a system that allows for easy evaluation
of the revenue size of commercial loan clients. But once the geographic
and revenue information is combined into one database, you will have all
of the information required to measure past performance under the Lending
Test and then, if needed, to develop measurable goals for a Strategic
Plan. This information includes the number of loans made within your assessment
area, the number of loans made in low-and moderate-income census tracts,
and the number of small business loans your bank has made within and outside
your assessment area. A bank can develop projections for the future by
analyzing this data--projections that may serve as measurable goals for
a Strategic Plan.
Although the new CRA is heavily weighted on lending performance, setting
measurable goals under the Service and Investment Tests is also necessary
if you choose the SPO. Measuring lending performance and setting goals
by analyzing geographic and revenue data is possible but analyzing performance
and setting goals under the Service and Investment criteria may prove
more difficult. A key factor in measuring performance in these areas is
the development of an accurate performance context for your institution.
While the performance context of your institution will impact your entire
examination, the value of your investments and services may be disproportionally
affected by an inaccurate definition of your performance context. Although
the examiners must develop the context under which an institution will
be evaluated, a bank may want to report additional information that the
examiners need to know to properly evaluate the bank's performance. Examiner
acceptance or consideration of the context you create for your institution
may play a key role in your CRA rating and may help your bank gain approval
of its Strategic Plan.
After conducting these analyses and developing a plan, a bank has two
more obstacles to overcome: public scrutiny and regulatory approval. After
developing a Plan and allowing for the consideration of public comment,
there is no guarantee of regulatory approval. A recent article in the
American Banker reported that eight banks had submitted Strategic
Plans for regulatory approval to the FDIC or FRB, only to have them rejected
for failing to set precise enough goals. This has discouraged other lenders
from pursuing the SPO, especially considering the sensitivity around release
of strategic information to their competitors. Providing the specificity
of goals necessary to gain approval of a Plan could provide competitors
with an edge that many banks are unwilling to allow.
A satisfactory CRA rating is important to banks for a variety of reasons,
but especially for those with expansion or contraction plans, those that
hope to participate, at any level, in the industry's current game of Pac
Man and those interested in becoming active in interstate branching. While
Silicon Valley Bank has not committed to the SPO, we believe that a full
consideration of it, as well as other examination alternatives, is necessary
to minimize the risk of regulatory intervention in our bank's business