Regulators Putting More Banks on a Short Leash

As the Wall Street Journal tells us, the Fed and the Office of the Comptroller of the Currency are issuing more “memorandums of understanding”. The MOUs not only put the bank on notice that its finances or controls aren’t up to snuff, but also call for specific remedies, such as cutting dividends, raising capital, or revamping procedures.

While this is a pro-active move, one wonders why these regulators didn’t become more aggressive a year ago. Note the Fed and OCC usually do not disclose if a bank has received a MOU, since the bank may not be at serious risk.

Separately, the FDIC’s problem bank list is updated tomorrow, so the downdraft in financial may continue if the list is longer than expected or contains the names of some large players.

From the Wall Street Journal:

The Federal Reserve and the Office of the Comptroller of the Currency, two of the nation’s primary bank regulators, have issued more of these so-called memorandums of understanding so far this year than they did for all of 2007, according to data obtained from regulatory agencies under Freedom of Information Act requests…..

The FDIC had 90 banks on its list on March 31. There have been five bank failures since July 11 and many other banks are considered at risk by regulators.

Government officials have been brokering the memorandums with institutions large and small, from National City Corp., a Cleveland-based bank with $154 billion in assets, to $660 million-asset First Private Bank & Trust of Encino, Calif., a unit of Boston Private Financial Holdings Inc….

Because banks don’t have to disclose the memorandums, bank customers and investors generally remain in the dark. In some recent cases, federal regulators haven’t disclosed more-serious enforcement actions against banks until after those banks have failed. Regulators are often wary of igniting a run on the bank, with panicked customers yanking deposits.

The inconsistency of public disclosures “is very frustrating as an investor in bank stocks,” said Gerard Cassidy, an analyst with RBC Capital Markets, noting that an enforcement action represents a red flag about a bank’s health and is also likely to put the brakes on that company’s growth….

For regulators, the memorandums are an early-warning system about troubled banks but aren’t meant to imply that a bank is at risk of failing. They are often a precursor to more-severe, publicly disclosed enforcement actions if conditions don’t improve.

“Enforcement actions, bank failures, and so on are sort of trailing economic indicators,” said Oliver Ireland, a former Fed attorney who is now a partner at Morrison & Foerster LLP. “We’re probably not done with all this yet. Not by a long shot.”…

While regulators wouldn’t disclose the names of banks with which they’ve entered into memorandums, three agencies provided tallies of how many agreements they’ve arranged, offering a snapshot of the problems engulfing the banking industry.

As of June 17, the Fed had entered into 32 memorandums with state-chartered banks and bank holding companies. For all of last year, the Fed entered into 31 such agreements.

The OCC, a division of the Treasury Department that supervises national banks, entered into nine memorandums with banks through Aug. 15, compared with just six in all of 2007.

The FDIC, which insures deposits at the nation’s banks and thrifts and also is the primary regulator of many smaller lenders, has entered into 118 memorandums as of Aug. 15, compared with 175 for all of 2007.

The Office of Thrift Supervision, which supervises federal savings and loans, refused to disclose its data. Senior deputy director Scott Polakoff said in an interview that the number had jumped. “We have seen a significant spike,” he said….

In certain years during the past decade, regulators issued more memorandums, indicating that regulators are still grappling to figure out how best to deal with troubled companies.

For example, the OCC brokered 32 in 1999 and 31 in 2000. The FDIC entered into 198 of these agreements in 2005. Typically, regulators choose to broker a private agreement if they feel management is being cooperative and the bank’s problems can be addressed quickly. The cause of those spikes isn’t clear.

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  1. Anonymous

    Re: "one wonders why these regulators didn't become more aggressive a year ago"

    >> What about like maybe 4 or 5 years ago?

  2. Anonymous

    Hope this doesn't seem Off topic:

    Lax Oversight by State and Federal Regulators
    before the
    National Commission on Fair Housing
    and Equal Opportunity aspx?fileticket=8ZeI1MEbaBk%3D&tabid=3009& mid=6208

    Federal banking regulators failed to reign in abusive practices at the lending institutions they regulated. Further, they prevented states from taking action against those institutions. Federally regulated lenders also took advantage of this lax oversight to originate huge volumes of loans. Depository institutions were able to use rules from the Office of the Comptroller of the Currency (OCC) and other regulators to their benefit. The OCC, following a similar rule issued by the Office of Thrift Supervision, issued a statement providing an exemption for its member institutions from state anti-predatory lending laws. Not only did it provide pre-emption for the member bank, but the pre-emption extended to the affiliates and third party vendors of the member institution. Thus mortgage brokers doing business on behalf of the company and any subprime subsidiary would, according to the federal regulators, be exempt from state regulation and state lending laws that prohibited abusive lending practices. This was damaging to communities because many states that had responded more quickly than the federal government and established stringent anti-predatory lending statutes were unable to apply those statutes to the subprime affiliates of some federally regulated banks. However, the OCC rule and others like it were a boon to lenders who were able to make larger profit margins on subprime loans. Lenders, who for years had been telling civil rights and consumer advocacy groups that there was insufficient need for credit in minority neighborhoods, were now able to do high levels of lending through their subprime affiliates in central city neighborhoods – much to the detriment of homeowners and buyers in minority neighborhoods. And while this was going on, the federal financial regulatory agencies did nothing except inhibit the efforts of state regulators to take any meaningful action. At the same time, FHEO failed in its responsibility to ensure that all federal departments work to affirmatively further fair housing.

  3. Kevin Pierce


    NEWSWIRE–A Kansas bank has become the ninth closed by federal regulators this year, amid bad real estate loans and falling housing prices.

    Not dollars or drachma or krona or kips,
    No sheqel or shilling or rand,
    Not ruble or rupee or money in clips:
    No sawbuck, a fifty, a grand.
    Not penning or fenning or guilder or gold,
    No euro or florin or francs,

    What we’re counting today is not bills that will fold,
    But banks.
    Light verse, ripped from the headlines

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