US Banker  |  March, 2010

By Cheyenne Hopkins

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WASHINGTON — Bank 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.

An increase in enforcement activity during the financial crisis was to be expected, but even longtime industry observers were caught off guard by the explosive growth and sheer number of actions.

"This is almost an unprecedented leap in enforcement actions," said Tom Vartanian, a partner at Fried Frank Harris Shriver & Jacobson. "When you combine the formal and informal actions, you can conclude there is a large segment of the banking agency under scrutiny at this point. … I find it surprising that the numbers are as high as they are."

Experts offered a host of reasons behind the dramatic increase, including a poor economy, continuing asset and capital problems at institutions and pressure from lawmakers who blamed regulators for not being tough enough in the lead-up to the crisis.

"It is clear that a lot of banks are having issues relating to not only borrowers having difficulty paying, but vastly declining collateral values," said Ellen Seidman, director of the Financial Services and Education Project at the New America Foundation and a former director of the Office of Thrift Supervision. "At least some of the banks were weakened going in because of the hit on Fannie and Freddie stock, and I think it's fair to say regulators have upped the ante on provisioning and capital requirements, because as the recession has gone on things have snowballed."

All four banking and thrift agencies more than doubled their level of formal enforcement actions in 2009, with the Federal Deposit Insurance Corp. leading the pack at 551, up from 273 in 2008.

At the Federal Reserve Board, which has been severely criticized for paying too little attention to bank regulation, formal enforcement actions nearly quadrupled last year, to 191.

The central bank also led the agencies in the number of informal enforcement actions, typically memorandums of understanding between a regulator and a bank that do not have to be reported publicly. The Fed filed 467 such actions in 2009, versus 216 in 2008.

Of the four regulatory agencies, only the Office of Thrift Supervision refused to disclose its level of informal enforcement actions, saying such data was private and could not be made public even under the Freedom of Information Act.

"The OTS does not consider information about informal enforcement actions to be public information," said William Ruberry, a spokesman for the agency.

Vartanian, who tracks enforcement numbers, said many recent orders point to banks' capital and asset-quality problems. A common characteristic has been a requirement for increased capital.

"There are two predominate issues impacting financial institutions around the country," he said. "One is capital adequacy and one is asset quality. … In these times there is no doubt if you get an asset-quality problem and a problem with capital adequacy that regulators are at least looking for informal memorandums of understanding."

Cornelius Hurley the director of the Morin Center on Banking and Financial Law at the Boston University School of Law, agreed.

"I would think the main driver for them is capital deficiencies and the capital deficiencies are probably a result of poor asset quality … and when you have those two going against you management takes a hit," he said.