The banking industry is facing its largest challenge since the Great Recession. Even though it is not at fault for the COVID-19 crisis, it may face considerable financial stress particularly once the forbearance period expires.

If and when that happens, we know from history what happens to bank examination and enforcement processes. Criticisms mount. Threats of enforcement action increase. Supervisory staff feels pressure to take stringent regulatory action. Disagreements frequently arise. Enforcement actions multiply. Reputations of banks and their directors and officers are ruined. Fear of personal liability spikes. Bank director resignations increase and the “no” answers from those invited to serve on the board multiply. 

This is exactly what happened during and after the Great Recession. Even though individual banks and their directors and officers were not responsible for the dramatic downturn in the economy and real estate values, they were stuck with the results.

According to Deloitte’s 2015 study on banking agency enforcement actions, formal enforcement actions reached their peak in 2010, as the federal banking agencies issued 1,795 formal enforcement actions. For the years 2008-2014, there were almost 6,000 formal enforcement actions.

Deloitte’s totals did not include informal, mostly undisclosed enforcement actions such as Memoranda of Understanding (MOUs). Our guess is that they also totaled many thousands during the same period. As the Deloitte report pointed out, “Many of these actions imposed onerous and expensive requirements on banks.”

CAMELS ratings (capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk) are the main driver of enforcement actions. But these ratings don’t fully take into account the competence, diligence, and good faith of the board and management. They are primarily results-oriented, which doesn’t really help the agencies in deciding wisely what enforcement action, if any, is appropriate.

How many enforcement actions in the near future will be taken against directors and officers? We do know that earlier this year, the OCC issued notice of charges against five senior Wells Fargo officers over sales practices during a period prior to 2016 and entered into consent orders and civil money penalty agreements with numerous other officers. We also know that in 2016, with revisions in November 2018, the OCC adopted a separate CMP Matrix for “institution-affiliated parties,” which include bank directors and officers. We also know that in recent months, the OCC issued a rash of consent orders and civil money penalties, including against CitiBank, Capital One, Morgan Stanley, and USAA.

In light of the immediate risk that banks and their directors and officers now face, AABD has undertaken a study of the banking agencies’ use of enforcement actions and their efficacy and costs. Unlike other industries, banks are subject to periodic examinations (every 12 or 18 months as required by law and sometimes more frequently).  Bank examination reports identify Matters Requiring Attention (MRAs) and Matters Requiring Immediate Attention (MRIAs) that guide banks to take corrective action. There are frequent discussions between examiners and bankers outside of examinations, and agency personnel review financial information between examinations. This robust process would suggest less of a need for formal or informal enforcement actions. Most bankers want to be viewed favorably by their regulators and will do their best to correct a deficiency identified by examiners. All that the examiners need to do in most instances is ask.

As part of AABD’s study on enforcement actions, we invite those banks that have become subject to enforcement actions to advise us on a confidential basis of any cost-benefit analysis they have performed. We also are asking each of the federal banking agencies questions about their historic use of enforcement actions, the efficacy and costs associated with those actions, and how they intend to use them in the near future.