Copyright 1996

InterAm Database

National Law Center for Inter-American Free Trade

OVERVIEW OF THE REGULATION OF BANKS

IN THE UNITED SATES

By: José P. Ceppi

Snell & Wilmer, L.L.P.

Phoenix, Arizona

I. Introduction

The regulation of banking institutions in the United States is divided among three agencies of the federal government and the banking regulators of each of the various states. This article seeks to provide a brief overview of the role and responsibilities of these three federal regulators and, as an example, of those of the Arizona State Banking Department.

II. The Federal Deposit Insurance Company ("FDIC")

The FDIC is the federal agency which insures deposits, up to $100,000 per account, in both state and federally-chartered banks. In addition, the FDIC is the primary regulator of state-chartered banks that are not members of the Federal Reserve Board. The FDIC is headed by a Board of Directors composed of five members. Three of these members are chosen by the President for four-year terms, with the consent of the Senate, including the Chairman of the FDIC. The two other board members sit ex officio and are the Comptroller of the Currency and the Director of the Office of Thrift Supervision, of the U.S. Department of the Treasury.

The FDIC conducts safety and soundness on-site examinations of each non-member, state-chartered bank at least every 18 months. For these examinations, the FDIC uses the Uniform Financial Institution's Rating System to assess an institution's condition. Under this system, each bank is assigned a uniform composite rating based on an evaluation of pertinent financial and operational standards. This overall rating is expressed through use of a numerical scale of one through five in ascending order of supervisory concern. A "one" rating indicates the highest rating and least degree of concern, while a "five" rating is the lowest rating and therefore the highest degree of supervisory concern. To arrive at the overall rating for a bank, the FDIC examiners will review five critical areas of a bank's operations, namely, capital adequacy, asset quality, management, earnings and liquidity. This rating is generally known as the CAMEL rating.

In examining banks, the FDIC places particular focus on bank management. In fact, the FDIC's examination manual states, in part, as follows: "The quality of management is probably the single most important element in the successful operation of a bank." The FDIC includes within the term "management" both the Board of Directors of an institution as well as the officers of the bank. Throughout the years, the FDIC has had to pay close attention to the role of directors in bank management. According to the FDIC, directors of a bank must provide a clear framework of objectives and policies within which executive officers must operate and administer the bank's affairs. Of particular instruction is the following FDIC statement of directors' potential liability for bank losses: "In general, directors and other corporate officers may be held personally liable for: a breach of trust; negligence which is the proximate cause of loss to the bank; ultravires acts, or acts in excess of their powers; fraud; and misrepresentation or conversion of the bank's assets." According to FDIC, the most common dereliction of duty by bank directors is the failure to maintain reasonable supervision of the activities and affairs of the bank, its officers and employees.

The FDIC has broad enforcement powers against the banks it regulates. It may terminate a bank's deposit insurance, issue Cease and Desist Actions and, if deemed necessary, to immediately invoke a temporary Cease and Desist Action. In addition, the FDIC has been given the power to suspend or remove a bank officer or director or prohibit participation by others in bank affairs when certain criteria can be established. It may also assess civil money penalties ("CMPs") for the violation of any law or regulation, any final order or temporary order issued, any condition imposed in writing by the appropriate federal banking agency in connection with the approval of any application, and any written agreement between a depository institution and a Federal Banking Agency. FDIC-imposed CMPs may range from a minimum of $5,000 to a maximum of $1 million or one percent of the assets of the financial institution, whichever is the lesser of the two, per day.

The FDIC acts as conservator and receiver for failing or failed banks. In this role, FDIC has broad powers to manage and dispose of the assets of a bank under conservatorship or receivership, without court interference, including the power: (a) to repudiate burdensome contracts; (b) enforce contractual obligations of the bank without regard to agreements not reflected on the bank's official records; c) to be free of any injunction which impairs its actions as receiver; and d) to determine claims of creditors and depositors of the bank.

III. Office of the Comptroller of the Currency ("OCC")Office of the Comptroller of the Currency ("OCC")

The OCC is directed by the Comptroller of the Currency, who is an officer within the U.S. Department of the Treasury appointed for a five-year term by the President, with the consent of the Senate. The OCC is responsible for the supervision and regulation of national banks. The Comptroller has the power to determine whether a proposed national bank can commence business by issuing the certificate of authority to commence banking business which is required of a national bank. Every national banking association is required to make periodic reports of condition to the OCC. The Comptroller has the authority to issue rules and regulations under the National Bank Act to govern its oversight of national banking associations. The courts have generally upheld the Comptroller's broad rule-making authority with respect to national banks.

The Comptroller has the authority to issue CMPs against national banking associations which violate any provision of the National Banking Act or any regulation or order issued thereunder. These CMPs may range from $5,000 to $1 million or one percent of the assets of the bank, whichever is less, per each day of a violation. In addition, the Comptroller has the power to initiate an action in Federal District Court to seek the forfeiture of a national bank's charter based on his finding that the directors of such bank have knowingly violated or knowingly permitted any of the officers or agents of the association to violate any of the provisions of the National Banking Act. In cases where such violation is established by the court, every director who participated in or assented to the same is held liable in his personal, individual capacity for all damages which the bank's shareholders or any person sustains as a consequence of the violation.

IV. Board of Governors of the Federal Reserve System ("Federal Reserve")Board of Governors of the Federal Reserve System ("Federal Reserve")

The Federal Reserve is composed of seven members, whom are appointed by the President for fourteen-year terms, with the consent of the Senate. The Federal Reserve has responsibility for the oversight of bank holding companies under the Bank Company Holding Act. Within 180 days after becoming a bank holding company, each bank holding company has to register with the Federal Reserve. The Federal Reserve may examine a bank holding company as it deems appropriate. The Federal Reserve is required, as far as possible, to rely upon the reports of examination made by the Comptroller, the FDIC or the appropriate state banking supervisory authority for purposes of its oversight of bank holding companies.

The Federal Reserve has the power to terminate a bank holding company's ownership or control of any subsidiary bank whenever it concludes that the continuation of a bank holding company's control constitutes a serious risk to the financial safety, soundness, or stability of the subsidiary bank or when the bank holding company is acting in a manner inconsistent with sound banking principles or with the Bank Holding Company Act. The Federal Reserve has the power to conduct administrative proceedings including the issuance of subpoenas and the taking of testimony under oath, in connection with the administration of the Bank Holding Company Act. The Federal Reserve has the power to bring an action in the appropriate United States District Court to seek enforcement of any outstanding order issued under the Bank Holding Company Act against a bank holding company.

The Federal Reserve may issue CMPs against individuals or parties who participate in a violation of any provision of the Bank Holding Company Act or any regulation or order issued thereunder. These CMPs may range from a minimum of $25,000 to a maximum of $1 million or one percent of the assets of the institution, whichever shall be less, per day during such violation. Anyone who knowingly violates any provision of the Bank Holding Company Act or any regulation of the Federal Reserve under that Act may be imprisoned for not more than one year and receive a fine not to exceed $100,000 per day for each day during which the violation continues.

Any party aggrieved by an order of the Federal Reserve may seek judicial review of the same by filing an action in the United States Court of Appeals within any circuit wherein such party has its principal place of business or in the Court of Appeals in the District of Columbia by, within 30 days of the entry of the order. In any such proceeding, the findings of the Federal Reserve as to the facts if supported by substantial evidence, shall be deemed conclusive by the reviewing court.

V. The Arizona State Banking Department (Banking Department)

The Banking Department is responsible for the execution of Arizona's laws and regulations dealing with financial institutions and enterprises ("Arizona banking laws"). It is directed by the Superintendent, who is appointed by the Governor for a four-year term, and who only may be removed for cause. The Banking Department examines each Arizona-chartered bank at least once in every twenty-four month period. It may, however, accept an examination report of a Federal regulatory authority in lieu of any examination required by Arizona law.

The Banking Department may conduct examinations and investigations to determine whether any person has engaged, is engaging or is about to engage, in any practice or transaction which constitutes an unsafe or unsound practice or a violation of any law or rule applicable to financial institutions or any order of the Department. The Banking Department may be appointed receiver of a financial institution or enterprise under its supervision. As a practical matter though, the FDIC is the agency which historically has acted as receiver or conservator for both state- and federally-chartered banks.

The Banking Department has broad remedial powers against any bank it supervises. It may assess a civil penalty in an amount of not more than $5,000 for any knowing violation of any provision of the Arizona banking laws or any rule or order adopted under such laws. Each day of a violation constitutes a separate offense. Also, it may issue a cease and desist order ("C & D") to restrain any act or practice which constitutes a violation of the Arizona banking laws or any rule or order of the Department. Any person aggrieved by such an order has 30 days within which to contest the order by serving a response to the Superintendent. Additionally, the Banking Department may remove or suspend from office any director, officer, employee or agent of any financial institution if the Superintendent determines that such individual is or has engaged, among other acts, in any of the following: a) any act or transaction which demonstrates personal dishonesty; b) a willful violation of an order of the Superintendent; c) a refusal to testify or produce records in response to a subpoena issued by the Superintendent; d) conviction of a crime involving fraud, misrepresentation or deceit; e) any violation of the Arizona banking laws; and f) any act or practice which would jeopardize the safety and soundness of a financial institution. The Banking Department may file an action in an Arizona state court seeking an injunction to enjoin a person from engaging in an act or practice which is in violation of the Arizona Banking statute or any rule or order of the Superintendent.

VI. Conclusion

Given the multiple banking regulatory agencies with which banks have to contend, there have been many legislative proposals to streamline the U.S. banking regulatory system. To date, these initiatives have not garnered the necessary support to become law. This fragmented regulatory process places a substantial premium on the ability of the various agencies to closely cooperate on matters of common concern. In the recent past, the agencies have worked closely in developing consistent approaches to regulatory issues and have a number of working groups to address such matters.