Publications & Resources

November/December 2009
Focus: Directors Issues

 

Regulatory Enforcement Actions Climb in WIB States

By Jeanine Catalano

Banks operating in western states are more than twice as likely to be issued a regulatory enforcement action compared with banks based in other parts of the country. This accelerating trend is placing heavy demands on bank directors. As demonstrated by the requirements in the enforcement actions, bank directors are being told improve their effectiveness, increase their oversight and ensure that the bank’s management team is strong.

Our team reviewed 17 months of enforcement actions issued by the nation’s four banking regulators from January 2008 to May 2009. Over that period the agencies issued 111 formal enforcement actions to institutions operating in the following states: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, Oregon, Utah and Washington. Thirteen percent of the 859 banks received formal enforcement actions, compared with 5 percent of banks nationwide.

While these states include just 11% of the nation’s banks, institutions operating in the region received 26% of the 431 total enforcement actions issued nationwide during the period.

What’s more, the number of formal enforcement actions per month has increased sharply both nationally and within these states. In the three month period from March to May 2009, the number of formal enforcement actions tripled compared with the corresponding period in 2008.

As Table 1 shows, national banks and thrifts were disproportionately likely to receive formal enforcement actions.

Table 1

 

Regulator

FDIC

OCC

FRB

OTS

Formal enforcement actions by primary regulator

53%

26%

5%

16%

% banks with primary regulator

65%

17%

11%

7%

 

Regulators Target Management and Directors
Within these states, California banks were issued the most enforcement actions over the period.  Fifty-six California banks received formal enforcement actions, representing 50% of all formal enforcement actions involving banks in the 11 states. In a majority, the percentage of banks with an enforcement action reached the double digits. 

Within these states, 50% of formal enforcement actions during the period required actions to address each of the following rating components: Capital, Asset Quality, Management, Earnings and Liquidity. Additionally, 14% of the enforcement actions included provisions addressing three of the components and 15% included provisions addressing four of the components. When four of the components were addressed, the component most frequently omitted was Earnings.

As shown in Table 2, the component most frequently addressed in formal enforcement actions in these states was Management, nationwide the most frequent component was Asset Quality. 

Table 2

 

 

CAMEL Component

% of Enforcement Actions addressing

Capital

Asset Quality

Management

Earnings

Liquidity

In WIB states and Colorado

82%

79%

88%

50%

78%

Nationwide

78%

84%

78%

61%

68%

 

Given the large percentage of enforcement actions with management-related provisions in these states, we conducted a deeper dive into these requirements. First, we found these requirements generally fell into three categories: Board Improvement, Board Action and Management Improvement. Second, the requirements were generally not onerous or beyond what would be considered sound practices.

The Board Improvement requirements focus on adding independent board members, commissioning an independent review of the composition, structure and effectiveness of the board, increasing board participation, assuming responsibility for approving policies, and requiring a review of board committee compositions.

 Board Action provisions commonly required improvements in corporate governance, actions to ensure competent management, and the development of a business or strategic plan.  Management Improvement requirements included hiring new management, evaluating existing management, commissioning an independent study of management, and assessing the capabilities of one or more officers in light of examination findings. Compensation, the accuracy of books and records, the development of a written ethics policy, and audit function improvement were also addressed.    

Director Action
Indeed, the rapid rise in enforcement actions places a heavy burden on the board’s shoulders. Based on our analysis of the management provisions, we believe that directors must be vigilant and recommend they start with following actions:

  • Develop a clear approach to evaluating board effectiveness at the next board meeting.

  • Take a hard look at executive management qualifications. Determine if the team has the skills and experience needed. Consider enlisting outside help to provide critical distance and facilitate the process of reaching conclusions.

  • Demonstrate active participation in developing and approving policies, strategies and goals. Pay particular attention to risk management policies and limits. Insist that management report bank performance relative to those limits.    

Jeanine Catalano is special adviser for Promontory Financial Group. She can be reached at 415-321-6408 or jcatalano@promontory.com. The article was written with help from Richard Magrann-Wells. 

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