Introduction to Problem Banks eBook
Introduction to Problem Banks
October 8-10, 2024 Live Virtual
@ www.csbs.org ♦ @csbsnews
CONFERENCE OF STATE BANK SUPERVISORS 1300 I Street NW / Suite 700 / Washington, DC 20005 / (202) 296-2840
October 8-10, 2024 Introduction to Problem Banks Live Virtual
ATTENDEES Alabama State Banking Department Riedel, Hudson
hudson.riedel@banking.alabama.gov janae.varner@banking.alabama.gov
Varner, Janae
Arkansas State Bank Department Chase, Adam
achase@banking.state.ar.us tcook@banking.state.ar.us rjackson@banking.state.ar.us amccormick@banking.state.ar.us
Cook, Thomas Jackson, RD
McCormick, Andrew
California Department of Financial Protection and Innovation Chung, Peter
peter.chung@dfpi.ca.gov jesse.lara@dfpi.ca.gov marisol.vazquez@dfpi.ca.gov
Lara, Jesse
Vazquez, Marisol
Michigan Department of Insurance and Financial Services Boedecker, Blake
boedeckerb@michigan.gov dalfonsoh@michigan.gov gottliebk@michigan.gov morrisond4@michigan.gov ridgewayj1@michigan.gov tarantoj@michigan.gov webern3@michigan.gov
D'Alfonso, Holly Gottlieb, Katie Morrison, Dawn Ridgeway, Jacob Taranto, James Weber, Norman
Minnesota Department of Commerce Chambers, Karen
karen.chambers@state.mn.us john.harrington@state.mn.us henok.waldsmayate@state.mn.us
Harrington, John
Waldsmayate, Henok
Mississippi Department of Banking & Consumer Finance Alexander, Andrew
andrew.alexander@dbcf.ms.gov
Clark, Matthew
matt.clark@dbcf.ms.gov
Nebraska Department of Banking and Finance Simmerman, Taylor
taylor.simmerman@nebraska.gov
New Hampshire State Banking Department Vargo, Henry
henry.v.vargo@banking.nh.gov
New York State Department of Financial Services Fontanilles, Jose
joe.fontanilles@dfs.ny.gov
Griffo, Marc
marc.griffo@dfs.ny.gov
Yu, Lan
lan.yu@dfs.ny.gov
South Carolina Office of the Commissioner of Banking Kichline, Patrick
patrick.kichline@banking.sc.gov
Utah Department of Financial Institutions Diehl, John
jdiehl@utah.gov
West Virginia Division of Financial Institutions Fry, Melissa
mfry@wvdob.org
Wisconsin Department of Financial Institutions Immel, Steven
steven.immel1@dfi.wisconsin.gov
INSTRUCTORS Arkansas State Bank Department Moseley, Baker
bmoseley@banking.state.ar.us
California Department of Business Oversight Nahnsen-Robison, Catherine Georgia Department of Banking and Finance Ensminger, Heather
catherine.nahnsen-robison@dbo.ca.gov
hensminger@dbf.state.ga.us
Iowa Division of Banking Irlbeck, Zachery
zachery.irlbeck@idob.state.ia.us
CSBS STAFF Hoyle, Katie
khoyle@csbs.org
Richardson, Amy Romano, Chris
arichardson@csbs.org cromano@csbs.org
Introduction to Problem Banks Live Virtual October 8-10, 2024
Tuesday, October 8, 2024 1:00 pm – 1:30 pm
Welcome & Introductions
Defining Problem Banks and History Perspectives
1:30 pm – 2:00 pm
2:00 pm – 2:15 pm
Break
Red Flags
2:15 pm – 3:00 pm
Case Study Breakout: Pre-Exam Planning Memo
3:00 pm – 4:00 pm
Wednesday, October 9, 2024 1:00 pm – 1:30 pm
Case Study Discussion: Pre-Exam Planning Memo
Exam Plan and Process
1:30 pm – 2:00 pm
2:00 pm – 2:15 pm
Break
Exam Plan and Process
2:15 pm – 3:00 pm
Case Study Breakout: Exam Results Memo
3:00 pm – 4:00 pm
Thursday, October 10, 2024 1:00 pm – 1:30 pm
Case Study Discussion & Wrap-Up
Enforcement Actions
1:30 pm – 2:15 pm
2:15 pm – 2:30 pm
Break
Enforcement Actions
2:30 pm – 3:00 pm
Intro to Bank Closures
3:00 pm – 3:30 pm
Q&A / Wrap-Up
3:30 pm – 4:00 pm
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Introduction to Problem Banks Training October 8-10, 2024
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Zoom Features
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Schedule • October 8: 1:00 PM – 4:00 PM ET
• October 9: 1:00 PM – 4:00 PM ET
• October 10: 1:00 PM – 4:00 PM ET
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Attendance Policy In order to receive a certificate of completion for a CSBS virtual training, an attendee may not miss more than 1 hour throughout the duration of the training. Attendees must also participate in all training activities including exercises, presentations, and assessments to receive the credit hours (CEHs) and certificate. If a certificate of completion is not important to you, you may continue in the training even if you no longer meet the attendance requirement.
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Instructor Contact Information
Business Analysis Director Georgia Department of Banking and Finance hensminger@dbf.state.ga.us Heather Ensminger
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Instructor Contact Information
Senior Bank Examiner Iowa Division of Banking zachery.irlbeck@idob.state.ia.us Zachery Irlbeck
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Instructor Contact Information
Assistant Deputy Commissioner Arkansas State Bank Department bmoseley@banking.state.ar.us Baker Moseley
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Instructor Contact Information
Regional Deputy Commissioner, Banking California Department of Financial Protection & Innovation catherine.nahnsen-robison@dfpi.ca.gov Cathy Nahnsen-Robison
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Introductions
NAME
AGENCY/STATE
HOW LONG HAVE YOU BEEN AN EXAMINER? AND WHAT IS YOUR AREA OF FOCUS?
WHAT IS SOMETHING YOU HOPE TO LEARN?
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Pre-Course Questionnaire Discussion
• Tell us about your experience filling out the questionnaire.
• Did you have any difficulty finding answers to the questions?
• What was the most interesting thing you found in your research?
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Prior Exam Case Study 1. Based on the current examination findings, what are the major areas you would like to focus on as EIC? 2. You are conducting an off-site review of State Bank of Anytown, what ratios, numbers, and/or information would you review to determine if any material changes have occurred since the previous examination? Why?
3. What type of risk indicators would have to be present to start the exam sooner than scheduled?
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Defining Problem Banks and History Perspectives When good banks go bad…
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Zoom Annotation Tool Click View Options at the top then click Annotate.
Click the Text Tool to type your answers.
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What is a problem bank? Using the annotate tools, type some characteristics below of what makes a bank a problem bank. (View Options > Annotate> Text tool)
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Definition: • A financial institution with a composite rating of 3, 4, or 5 • A financial institution under an enforcement action • Not to be confused with “Troubled Bank”
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Two Scenarios Known Problem Bank
Known Non-Problem Bank – Surprise!
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What’s the difference? Using the annotate feature: • How would you prep for each scenario?
• How would the examination change once you got there?
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Today’s Landscape: In the chat, describe what you see as either present or looming risks?
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What we plan to cover in this course:
1. Red Flags 2. Examination Techniques 3. Enforcement Actions
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Brief History of Crisis and Response
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The Great Depression • The Banking Act of 1933 • The Security and Exchange Act of 1934 • The Banking Act of 1935
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The 1980s
• Depository Institutions Deregulation and Monetary Control Act of 1980 • Competitive Equality Banking Act of 1987 • Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) • Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991
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9/11/2001
USA PATRIOT ACT significantly increased regulators responsibilities to ensure that financial institutions implement systems to comply with The Bank Secrecy Act.
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The Great Recession – December 2007
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The Pandemic Effect and Beyond
Liquidity
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What’s coming next?
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Questions
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Problem Bank Training Red Flags
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Objectives of this section:
Define Red Flags
Sources of information used in Red Flag identification
If seen, some questions to ask.
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Definition – Red Flags
• Indicators of actual or potential problems or heightened risk
• Can be indicators of root problems (leading indicators) or symptoms/results (lagging indicators).
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Where do we find red flags? Use the annotate feature to type your answers:
What sources can you use to find red flags?
How do you evaluate or decide which red flags to look at?
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Leading or Lagging?
Increase in loan delinquencies
Increase in a particular market concentration Turnover in one or more of executive management
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Whistleblowers – who are they and why do they contact us?
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Former Management or Directors
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Objectives: Definition Sources of red flags
Questions to ask
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Breakout Group Exercise Breakout group exercise (20 minutes) In your group: 1. Select a spokesperson 2. Discuss the red flag
3. Come up with questions (at least 3) you would ask management or areas you want to follow-up on. 4. will present their questions to the larger group. Your group 5. Email your list of questions to khoyle@csbs.org.
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Breakout Group Exercise Red flag is: • Groups 1 & 4 : Increase in borrowings with the FHLB • Groups 2 & 5: Increase in the level of AOCI (negative) in the bank’s AFS securities. • Groups 3 & 6: Increase in concentration of depositors in one market sector.
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List of Red Flags
• Internal reporting delays, errors, omissions • Concentrations, of any kind • Delinquencies • Over 90 and accruing • Weak audit/examination finding remediation tracking • Rapid growth and/or new material product lines • Unfunded commitments • Inaccessible/unresponsive management and/or board • Uninsured deposit levels • Adjusting policy limits simply to avoid exceptions
• Increase in non-core funding
• Decrease in core deposits or no core deposits • Loan renewals without any paydowns
High Net Interest Margin
•
• Loan review scope influenced by management
No audit
•
• Inadequate CECL (ALLL back in the day) methodology • Not reporting policy exceptions to the board
Turnover
•
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In conclusion:
Definitions Sources for red flags Questions to ask
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Questions?
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Examination Plan & Process
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Go to www.menti.com and use the code provided
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Preparing for Exam
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Exam Scope
Exam scope should be highly detailed.
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Identify a Strategy
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Successful Resolution
ORDER CHAOS
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Organization
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Maintain Documentation
Documentation is key!
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In the chat: What are some examples in a word or two that were a challenge for you being an EIC in more of a problem situation?
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Gather information
Organized, accurate & complete information.
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Document Management’s Promises
Generally speaking, avoid personal opinions.
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Federal Counterparts
Present a united front with federal counterparts.
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Key Points: • Workpaper procedures • No extra copies • Learn about the bank
• You aren’t alone • CBOs & RBOs
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Communication
Communication is critical to the exam process.
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Reporting
Reporting frequency depends on situation.
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Awareness
Consider regular meetings with examiners.
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Poll: What is your experience with joint exams?
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Communicate with Bank Management
Bank management should not be hearing about Issues for the first time at the exit meeting.
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Written Communication
E-mails should be protected through encryption.
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Confidential Meetings
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Documentation • Include only information about subject bank • Buddy up at meetings • Learn from others & self • Body language & words
• No ultimatums • Keep your cool
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Exam Reports and Enforcement Actions
Prioritize recommendations/areas of weakness.
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Exam Reports and Enforcement Actions
Clearly communicate expectations & timelines.
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Exam Reports and Enforcement Actions
Obtain & document commitments for corrective action.
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Exam Reports and Enforcement Actions
Escalate regulatory action when appropriate.
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Exam Reports and Enforcement Actions
Put in your best effort.
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Exam Reports and Enforcement Actions
Communicate & compromise where you are able.
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Factors Influencing Upgrades and Elimination of Enforcement Actions
Sustainability is key.
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Factors Influencing Upgrades and Elimination of Enforcement Actions
Consider consequences.
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Factors Influencing Upgrades and Elimination of Enforcement Actions
Terminate action after substantial compliance & sustained performance.
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Attendee thoughts….
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Go to www.menti.com and use the code provided
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Enforcement Actions
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Go to www.menti.com and use the code provided
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What is an enforcement action?
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Why do bank regulators use them?
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Types of Enforcement Actions
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Poll: Which types of Enforcement Actions have you seen? Formal, Informal, or Both
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Typically Joint Actions
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Contents of an Enforcement Action
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Contents of an Enforcement Action • Identifies parties to the document
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Contents of an Enforcement Action • References a specific examination
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Contents of an Enforcement Action • Requires signatures of directors
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Contents of an Enforcement Action • Sets time frames for initiating change
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Contents of an Enforcement Action • Usually requires reports to regulators
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Informal Actions
Focus on issues of risk/regulatory concern.
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In the chat: In what areas have you seen management push back?
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Board Resolutions (BR)
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Board Resolutions (BR) • Most informal option • Initiated by regulator • Based on exam findings • Management crafts • Similar to MOU • Not public
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Board Resolutions (BR) • Documented in minutes • Required progress reports
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Board Resolutions (BR) • Understand the problems • Capable of correcting • Possess skill sets needed • Willing to act in a timely manner
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Board Resolutions (BR) • Can be effective • If breached, the foundation for future actions • In place until Board of
Directors rescinds with regulator concurrence
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In the chat: Do you think Board Resolutions can be effective? Yes or No
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Memorandums of Understanding (MOU)
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Memorandums of Understanding (MOU) •Regulators are a party to & craft the document •Developed for banks needing assistance with:
• Weakness identification • Develop corrective action • Set timeframes/prioritize • Reporting progress
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Memorandums of Understanding (MOU)
•Not publicly reported by regulators •Bank disclosure? •Issued to state member and non-member banks
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Memorandums of Understanding (MOU)
•Typically, joint action •Signed by Regulators & Board •Likely prohibit branching & merger activity
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Memorandums of Understanding (MOU) •Challenges with joint documents •Follow-up visits to assess compliance •In place until points addressed,
overall condition is materially better – determined by exam
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Poll: Which do you see more often? Board Resolutions or MOUs?
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Formal Actions
Focus on issues of risk/regulatory concern.
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Written Agreements • Formal/public actions • FRB’s preferred method • OCC often uses • Signed by all parties • FDIC rarely uses
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Written Agreements
• Condition more severe or management willingness in question • Lengthier documents • Required audited financial statements disclosure
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Written Agreements • Joint actions • Terminated after compliance • Issued to state member banks, signed by Regulators & Board • Public action
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Consent Orders
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Consent Orders • Used by states & FDIC, sometimes FRB & OCC • Unsafe/unsound practices and/or violations • Reasonable cause • Issued to state member and non-member banks
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Consent Orders • Severe compliance issues • Legal involved in drafting • Legally enforceable • Signed by Regulators & Board
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Consent Orders
• Exams to determine compliance • Statements of fact addressing each point • Requires bank to immediately stop inappropriate action or implement affirmative action
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Consent Order Proceedings
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Consent Order Proceedings
•Agency Issues Notice of Charges and of Hearing • Hearing with ALJ – public & similar to bench trial
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Consent Order Proceedings •Hearing held in 30-60 days •ALJ decision effective after 30 days • US Circuit Court of Appeals •States have similar procedures
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Prompt Corrective Action (PCA) • Capital key part of decisions • Since FDICIA in 1991 • Framework to preserve value to an acquiring institution
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Prompt Corrective Action (PCA)
• Five capital categories • Specific legal ramifications
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New BASEL III Requirements
Total Risk Based Capital
Common Equity Tier 1 RBC Tier 1 RBC
Leverage Ratio
Supplementary Leverage Ratio
%
≥ 10
≥ 8 ≥ 6 < 6 < 4
≥ 6.5 ≥ 4.5 < 4.5
≥ 5 ≥ 4 < 4 < 3
N/A
Well Capitalized
≥ 8 < 8 < 6
≥ 3 < 3
Adequately Capitalized
Undercapitalized
< 3
N/A
Significantly Undercapitalized Critically Undercapitalized
N/A
Tangible Equity (defined as Tier 1 Capital plus non Tier 1 perpetual Preferred stock) to Total Assets ≤ 2
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Prompt Corrective Action (PCA) Capital Categories 1. Well capitalized 2. Adequately capitalized 3. Undercapitalized 4. Significantly undercapitalized 5. Critically undercapitalized
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Prompt Corrective Action (PCA) Capital Categories 1. Well capitalized 2. Adequately capitalized 3. Undercapitalized 4. Significantly undercapitalized 5. Critically undercapitalized
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PCA - Restrictions
•Regardless of PCA category o No dividends o No management fees o No capital distributions if it moves bank to undercapitalized
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Other Enforcement Actions
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Questions?
Introduction to Bank Closures
Overview
Overview of an Orderly Bank Closure
Step 1 • Examination results reveal serious problems and viability of the bank is threatened. • The chartering agency (State or OCC) contacts FDIC-DRR and a projected failure date is set.
Overview of an Orderly Bank Closure
Step 2 • DRR obtains a download from the bank and prepares a data room for bidders to conduct due diligence. • Banks that meet certain criteria are invited to bid. • A winning bid is selected based upon the lowest cost to the fund
Overview of an Orderly Bank Closure
Simultaneously, the bank is out looking for a solution, either a capital investor or investors or a merger partner.
• Often called parallel paths
Possible Outcomes 1. FDIC finds a winning bidder, whole bank. With or without loss share.
2. FDIC finds a winning bidder, partial bank. 3. FDIC finds a bank to payout the depositors. 4. FDIC sets up a bridge bank.
Overview of an Orderly Bank Closure
Step 3 – Day of Closure
• On the day of the closure, the licensing agency will go to the bank, serve papers of seizure, and tender the seized bank to the FDIC.
• The FDIC will announce the winning bidder, and the bank will open on Monday under that bank’s name.
Overview of a Fast Failure
• Decline happens so quickly, DRR is not ready. • Usually happens because of liquidity. • Often results in some sort of bridge bank.
Questions?
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Developing the Workforce of Tomorrow One of the CSBS strategies is to contribute to innovative learning solutions and develop capabilities that enhance examiner skillsets and promote networked supervision resulting in a high performing, collaborative, and trusted state regulatory workforce.
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