Alert
Alert
By
02.29.12
This discussion is being provided to our clients and friends to analyze the challenges presented in this difficult economic environment when an FDIC-insured institution experiences a capital difficulty and is directed by the Banking Regulators1 to restore the institution's capital adequacy.2 In the past four years, the FDIC has closed approximately 400 insured institutions—as of January 1, 2012, the FDIC has indicated that there were over 800 banks on its "problem bank list." The difficulties experienced by many of these institutions are summarized in this analysis— and may provide useful guidance when attempting to resolve capital issues in the next few years.
In the typical current enforcement scenario, the national recession produced increased loan defaults and accompanying deterioration in asset valuation, which resulted in the Banking Regulators taking aggressive action to prevent a bank failure by demanding significantly increased levels of capital, loan loss reserves and improved risk management. This regulatory reaction has been implemented through the issuance of an enforcement order that contains: (a) a capital directive that raises a bank's capital level far above the capital level necessary to be deemed a "well-capitalized" institution; (b) a prompt corrective action order; and (c) a multitude of regulatory improvements intended to improve the ability of bank management and a board of directors to perform their management and oversight functions. Accompanying these directives is a designation that the bank is a "troubled" institution.3
The combination of these regulatory actions has the effect of immediately imposing operational restrictions that, as a practical matter, impede the bank's ability to raise capital and restore operational stability.
This analysis examines from a practical perspective the issues presented to management and a board of directors of a bank and its holding company when the bank has been issued a capital directive and related enforcement orders (collectively, "capital-related orders")4. Among other things, the analysis identifies the various fiduciary and other legal obligations faced by stakeholders in a troubled bank, including its holding company, the boards of directors and management. In addition, this analysis describes the closing process typically followed by the FDIC should a bank fail, the potential liability of a board of directors and management following a failure, as well as reasonable steps that should be considered to defend against potential claims frequently made against former officers and directors by the FDIC.
1The term "Bank Regulators" includes the Federal Deposit Insurance Corporation (the "FDIC"), the Office of the Comptroller of the Currency (the "OCC") and the Board of Governors of the Federal Reserve System (the "FRB"). (While the emphasis in this analysis will be on the regulatory actions and responsibilities of the federal bank regulatory agencies, the same considerations will apply to the regulatory oversight and safety and soundness responsibilities of comparable state banking agencies.)2
In this memorandum the term "bank" will refer to an FDIC-insured depository institution, including commercial banks, savings associations and industrial loan companies.3
Section 32 of the Federal Deposit Insurance Act (the "FDI Act) requires troubled institutions to provide the FDIC with 30 days written notice prior to the appointment of any director or senior executive officer. As implemented by regulations issued by the Bank Regulators, a troubled institution is defined as one: (a) with a composite CAMELS rating of "4" or "5;" (b) subject to a formal enforcement action; or (c) informed in writing by the Banking Regulator that it is in troubled condition on the basis of the bank's most recent report of condition, report of examination, or other information available to the Bank Regulator.4
For purposes of discussion, the discussion that follows assumes that the bank has a holding company which may have outstanding trust preferred shares issued at the holding company level.
Download: Responding to Capital Directives and Related Enforcement Actions by Banking Regulators