An unprecedented rise in enforcement actions against banks has caught even longtime industry observers off guard.
Regulators issued 1,143 formal enforcement actions against banks and their holding companies last year, a new record and more than double the 2008 tally.
Informal actions by the agencies, which are not made public and often go untracked, also doubled during that time, reaching 1,099 last year, according to data provided to American Banker.
Regulators defended their actions as a natural response to the economy, but some observers think they are playing catch up or are responding to political heat for being asleep at the wheel early in the crisis. Some contend the pendulum has now swung too far, and regulatory zeal is hampering the economic recovery.
In an online poll, a majority of respondents, or 52%, said continued economic weakness and the state of banks' balance sheets are the primary reason for the record number of enforcement actios. Another 37% attributed it to pressure from Congress, while just 11% said regulators are playing catch up because baseline enforcement numbers were low.
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[Editor's note: the following is from a reader's email.]
Your informative article, Regulatory Actions Hit a Record Level in '09, included compelling facts and figures but only scratched the surfaces as to what the data mean.
In our in-depth monitoring of regulatory trends at banks, we have learned that more than half of the actions issued in 2009 specifically directed financial institutions to take concrete actions to improve their health. More often than not, these directives required specific actions with respect to capital, management, asset quality, earnings, and/or liquidity.
Our study indicates that the percentage of formal actions that required strengthening of management, the board or improving oversight, has climbed from close to 70% in the first quarter of 2008 to over 85% in the last quarter of '09. And of the formal actions that included specific improvement directives, the percentage that directed an institution to increase capital, usually as a percent of assets, as a dollar amount or in a plan to raise capital, has consistently risen over the last eight quarters from just over 70% in the first quarter of '08 to approximately 95% in the fourth quarter of '09.
We see these and other trends within the overall growth trend as signals to the industry. These signals should not be ignored; on the contrary, they should be watched carefully.
Jeanine Catalano
Special Adviser
Promontory Financial Group