WASHINGTON - Bank examination reports just became signficantly less confidential.
A federal appeals court in Cincinnati ruled Aug. 3 that parties to a lawsuit can seek examination reports during discovery, the exchange of documents prior to trial. Banks previously did not have to turn over these reports.
The U.S. Court of Appeals for the Sixth Circuit rejected Bankers Trust Co.'s efforts to shield the examination results from Procter & Gamble. The consumer products conglomerate wants to use the results against Bankers Trust, which it charged pressured the company into an interest rate swap without fully disclosing the risks. The transaction led to a $102 million after-tax loss.
The court voided banking agency rules that prevent institutions from releasing their exam reports, ruling that Congress never gave the Federal Reserve Board or other regulators authority to interfere with the judiciary.
The decision could affect the entire industry, because it shatters safeguards intended to keep the reports confidential, said Michael F. Crotty, deputy director for litigation at the American Bankers Association.
"It makes it easier by far for litigants to get their hands on documents that should be preserved in confidence," he said.
Keeping reports confidential serves a vital public policy purpose, said Gil Schwartz, a partner at Schwartz & Ballen in Washington.
"A decision like this has the potential to disrupt the exam process," Mr. Schwartz said. "It puts in (bankers') minds the concern that the information might ultimately become public. That could cause the process to become more adversarial, because you'll have to protect yourself."
Banking industry advocates said they expect a Supreme Court showdown if Bankers Trust appeals.
Bankers Trust spokesman Tom Parisi said the bank is evaluating its options. He declined to comment further.
Prior to the Sixth Circuit's decision - which affects banks in Ohio, Michigan, Kentucky, and Tennessee - litigants had to request the reports from the bank's regulator.
The agencies usually refused to turn over the examiner's subjective comments, forcing the parties to go to court.
The Sixth Circuit changed that. Now a litigant can ask the bank for a report directly. If the bank refuses, the litigant can ask the trial judge to order the institution to comply. The judge, however, must give the regulator a chance to object.