JULY 31, 2009
Regulators Are Getting Tougher on Banks
Taking Action Now Seeks to Prevent Failures; Some Targets Say It Makes a Recovery Harder
By DAMIAN PALETTA and DAN FITZPATRICK
Federal regulators have escalated the number of wounded banks they have essentially put on probation, with some of the targeted banks complaining that the action is too harsh.
The Federal Reserve and the Office of the Comptroller of the Currency, two of the primary U.S. banking regulators, have issued more of the so-called memorandums of understanding so far this year than they did for all of 2008, according to data obtained from the agencies under Freedom of Information Act requests.
At the current rate of at least 285 so far, the Fed, OCC and Federal Deposit Insurance Corp. are on track to issue nearly 600 of the secret agreements for the full year, compared with 399 last year. Memorandums of understanding can force financial institutions to increase their capital, overhaul management or take other major steps.
Such sanctions typically aren't publicly disclosed to avoid possibly rattling depositors and shareholders. Institutions hit with memorandums this year range from giant Bank of America Corp. to regional bank Colonial BancGroup Inc., based in Montgomery, Ala., to Berkshire Bancorp Inc., a New York bank with just 12 branches.
The sharp increase comes as Congress considers changes proposed by the Obama administration that would overhaul the way the U.S. government oversees banks. Many bankers and analysts believe those changes would result in an even more assertive regulatory apparatus. Regulators have been criticized for going too easy on banks and securities firms.
Regulators say getting tougher now could prevent some struggling banks from failing as borrowers fall behind on their payments and the U.S. economy slogs through recession. A total of 64 banks have failed this year, up from 25 in 2008.
"Regulators' natural response is: Oh my goodness, we've got to toughen up," Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said in an interview.
Some bankers counter that the regulatory squeeze is making it even harder for them to make good loans that would help them recover. Others say banks are being forced to meet arbitrary standards that exceed what regulators normally require. "It's frustrating and aggravating," said Pat Sheaffer, chairman and chief executive officer of Riverview Bancorp Inc., of Vancouver, Wash., which has $920 million in assets and 18 branches.
In January, the Office of Thrift Supervision issued Riverview a memorandum of understanding that requires the bank to increase its total risk-based capital, a measurement of financial strength, to 12% from 10.7% as of Dec. 31. Mr. Sheaffer said there was little dialogue with the agency before the requirement was imposed.
The OTS didn't return phone calls seeking comment.
James Miller Jr., CEO of Fidelity Southern Corp., said he was surprised to be hit with a memorandum of understanding in December because the Atlanta bank's exposure to residential real estate is low in comparison to other banks in the area.
Regulators want Fidelity to reduce its residential real-estate construction lending to no more than 100% of total capital, down from about 120%. Since the agreement, the bank has lowered its exposure to 110%.
"I am not about to say anything about my regulators," Mr. Miller said. The bank got $48.2 million in capital from the taxpayer-funded Troubled Asset Relief Program right after it signed the memorandum. "I concluded that regulators were satisfied with how we were running our bank," he added.
Steven Rosenberg, Berkshire's chief executive, disagreed when regulators approached him about a memorandum of understanding that would change how certain assets are classified and the amount of reserves set aside to cover potential losses. He relented and then disclosed the agreement publicly.
"You don't fight with the guys who regulate you," Mr. Rosenberg said.
Bank of America declined to comment. Colonial BancGroup didn't respond to a request for comment.
The increase in memorandums of understanding has been especially sharp at the Fed. Through June 30, the agency has issued 99 memorandums, compared with 94 for all of 2008.
Fed governor Daniel Tarullo, a close adviser to President Barack Obama during last year's campaign, now heads a committee in charge of the Fed's bank-supervision division. Mr. Tarullo has pushed for the Fed's 12 regional banks to take a more harmonized approach to bank regulation, according to people familiar with the matter.
In the past, the Fed has faced criticism that its regulation was too uneven, with examiners in some areas of the U.S. accused of being too easy on banks, while examiners in other regions were much tougher.
"There is an awful lot of talk among bankers that ... 8, 10 and 12 [percent] will be targets FDIC will want to see going forward, even for healthy banks," said Ted Awerkamp, chief executive of Mercantile Bancorp Inc., referring to three ratios of financial strength known as Tier 1 capital, Tier 1 risk-based capital and total risk-based capital. The Quincy, Ill., bank holding company entered a memorandum with the Fed earlier this year.
A separate agreement with the FDIC last year for a Naples, Fla., bank owned by Mercantile required that bank to attain capital ratios that are well above the minimum levels usually required by regulators.
Memorandums of understanding can lead to sterner, public sanctions if a bank is seen as not doing enough to correct problems. Colonial, which has been battered by bad real-estate loans, disclosed in March that it received memorandums from the FDIC, Federal Reserve Bank of Atlanta and Alabama banking regulators.
On Monday, Colonial announced it "consented" to a cease-and-desist order from Alabama and the Federal Reserve Board of Governors related to "the issues of capital, liquidity and allowance for loan losses."
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