Examiners are expected to bolster their scrutiny of bank financial statements in the wake of Bankers Trust Corp.'s admission that it illegally inflated earnings.
"Everything we read in the newspaper educates us, and if we see something happening like this, we give it a little more attention," said James L. Sexton, director of supervision at the Federal Deposit Insurance Corp.
L. William Seidman, former FDIC chairman and an industry consultant, said examiners normally increase oversight after a scandal surfaces. "They will take a look at this at other banks," he predicted.
Bankers Trust pleaded guilty Thursday to three felony counts and agreed to pay a $60 million fine for using $19.1 million in unclaimed customer funds to boost earnings and reserves. It also paid $3.5 million to settle similar New York State Banking Department charges.
"Bankers Trust's guilty plea demonstrates the serious consequences for all financial institutions that would violate the law by misapplying their customers' funds in order to falsely enhance their financial results," said Mary Jo White, the U.S. Attorney for the Southern District of New York. "It is conduct that will not be tolerated."
Though internal controls may get more attention from examiners, most called the Bankers Trust case an isolated incident and see no need for new regulation.
"There may be others out there that are bad boys, but I would not generalize," said James J. McDermott, president of Keefe, Bruyette & Woods Inc. "While general earnings pressure exists within the industry, this seems more symptomatic of problems at a particular institution."
Mr. McDermott said the crime occurred from 1994 to 1996, a time when Bankers Trust feared weak earnings could jeopardize its independence.
Diane M. Casey, national director of financial services at Grant Thornton LLP, said she suspects that very few banks would dare to inflate earnings illegally.
"I don't see a wholesale effort by banks to defraud their investors and the public, because once you start down that path it is something that you can't get away from," she said. "Once you stop, you would have to recognize whatever kind of loss there was."
Mr. Seidman, now a CNBC commentator, said internal fraud historically has not been a problem in the banking industry. "This is why the Bankers Trust case is so startling," he said. "The way bankers lose money is when someone defrauds them. So they are very fraud-conscious."
Industry officials said the scandal does not indicate a need for new laws or regulations. "Both the banking agencies and the Securities and Exchange Commission have plenty of existing authority to redress these particular actions," one trade group official said.
A senior Federal Reserve Board official said cases such as this highlight the need for banks to have strong internal controls because it is very tough for examiners to detect fraud.
"There are a trillion transactions," the Fed official said. "You can't look at every one. You can't be there 24 hours a day all the time. It is the bank that needs to have internal controls and safeguards."
