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Plans for new department likely to reduce red tape

Rochester Business Journal
August 5, 2011

The walls between banking and insurance regulation will come down in October, when the new state budget creates the Department of Financial Services. Bankers say the reorganization will improve efficiency, but it does not yet appear that it will have a major impact on banking regulation.
According to the department's mission statement, the merger is intended to right-size and make state financial services more efficient. Streamlining and consolidation will be key in the agency, a combination of the current Banking and Insurance departments.
During the transition to the new department, policymakers will examine current regulations in a search for those that overlap, in order to rationalize the process. The actual changes in regulation enacted with the merger, however, appear to be minimal.
George Hamlin, CEO of Canandaigua National Bank & Trust Co., says Gov. Andrew Cuomo's decision to consolidate the state's Banking and Insurance departments is the result of a movement over the last 10 years. Hamlin served as chairman of the New York Bankers Association in 1993.
Efforts to refine financial regulation were also made by former Gov. Eliot Spitzer in 2007 when he formed a blue-ribbon commission to modernize financial services. According to the 2011-12 executive budget, the initiative also will combine segments of the Consumer Protection Board with the Insurance and Banking departments to form a single agency, headed by a superintendent appointed by Cuomo.
Michael Smith, president and CEO of the New York Bankers Association in New York City, says having one superintendent will help to simplify organization and operation.
"Our view is that applications would be processed more quickly, that extraneous regulations would be able to be eliminated more quickly, that you could respond more quickly to overlapping and you would not have to go through numerous types of layers," he says.
The actual merger of the departments will occur Oct. 3. In the meantime, officials will sift through the various layers of regulation and look for ways to reduce the amount of red tape.
In his State of the State address, Cuomo noted that the insurance and banking sectors are growing increasingly interconnected and that the government needs to be able to respond to these changes.
"I believe our current organization is not effective because it is not organized the way Wall Street works anymore," he said. "The divisions between insurance and banking and consumer protection don't exist in the marketplace, and much of the activity is falling through the cracks of our regulatory entities."
Clifford Smith, professor of finance and economics at the University of Rochester's Simon Graduate School of Business, shares the governor's view that the merger is in line with what has happened in the marketplace.
"When those two departments were established, there were very strong regulatory prohibitions that kept banks out of insurance and insurance out of things that were more traditional banking services," he says. "A lot of the regulatory prohibitions have been at least substantially weakened."
Banks have been buying insurance firms more and more frequently. First Niagara Risk Management Inc. grew to become the 50th-largest insurance broker in the nation in 2010, acquiring other firms to expand its reach. Canandaigua National Bank also offers insurance through its agency.
The combination of the two state departments is just the first step of the plan; the second involves an evaluation of the two departments with an eye to improving functionality. A working group has been examining the operations and regulations of both offices since May, looking for ways to increase efficiency.
Frank Hamlin, president of Canandaigua National Bank, says much of the organizational streamlining could come from such efforts.
"They will hopefully find provisions that they are investigating or looking at that are no longer relevant or pertinent and go ahead and abandon them, thereby not wasting time," he says.
The consolidation also will cut staffing and overhead; the agency will be headquartered in Albany and New York, with smaller offices throughout the state. According to the department's mission statement, its creation will allow the state to "more rapidly and adroitly respond to changing market practices and consumer preferences."
Outside of organizational and structural changes, however, it appears that the impact of merger will be limited. The Financial Services Law creating the new department gives the state the right to regulate financial products or services that are currently unregulated, but both nationally chartered and state-chartered banks are already regulated.
Jeff Schoenborn, spokesman for First Niagara Financial Group, which includes state-regulated insurance brokerage subsidiary First Niagara Risk Management, says it backs efforts to improve the efficiency and effectiveness of the industry's regulators.
NYBA's Smith says his agency worked with the Legislature to draft the merger plan.
"Our view is and remains to be that it is better to have more centralized regulation than adding additional layers," he says. "We think the state has an opportunity here to cut red tape, to cut the regulatory burden and do it in a very responsible way."
For nationally chartered Canandaigua National Bank, there will be no impact, as federal law supersedes state law. Frank Hamlin says the real value of the initiative will be in trimming bureaucratic excess.
"This is really more for state-chartered institutions, and I think that the most productive part of this legislation will be the process of people sitting down and looking at what is being regulated and why, and eliminating unnecessary efforts and supervision over things that are no longer important," he says.
The consolidation's impact may be more geared toward organizational changes than reregulating the banking industry. UR's Smith says he is unsure there will be a material impact on the banking industry. He also says success largely will depend on internal implementation details, which are difficult to judge at this point.
NYBA's Smith says the merger will strengthen New York's financial services market to operate better over the long term.
"We are going through the organizational phase now, and it will not really come online and we will not see some of the details coming out of the fold, but I think the impact will be more long-term in nature," he says.

Christine Loman is a freelance writer and a former Rochester Business Journal intern.8/5/11 (c) 2011 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail

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