Bank Director's Training

The board's response

Supervisory
Actions

Introduction

Concerns examiners raise are usually addressed by bank management in an adequate and timely manner. However, some concerns are of such a serious or repetitive nature, or their correction is beyond the abilities of bank management, that bank regulators are compelled to take more aggressive action than just addressing the issues in a report of examination. These actions are referred to as “supervisory actions.”

This section describes the range of supervisory actions that the Federal Reserve may take to address problems or deficiencies at a bank. These actions may be taken against the bank, bank management, directors, employees or institution-affiliated parties. State banking regulators have similar authority to take supervisory action, and often do so jointly with the Federal Reserve. Additionally, this section discusses general approaches you might take to help ensure the bank’s compliance with a supervisory action.

After you successfully complete this section, you will be able to:

describe the types of supervisory actions that the Federal Reserve may take;
list the key differences between informal and formal supervisory actions;
describe the role of the board of directors in addressing deficiencies or problems at the bank; and
describe the director’s role in helping to ensure compliance with a supervisory action.

Overview

Supervisory actions fall into two categories: formal actions and informal actions.

Supervisory Actions

Examples of each type

Special Characteristics

Formal

Formal actions are used to address practices that the Federal Reserve believes to be unlawful, unsafe or unsound.

Formal actions include:

cease and desist orders,
prompt corrective action directives,
safety and soundness orders,
capital directives,
removal and prohibition orders,
civil money penalties, and
written agreements.

Formal enforcement actions are made public. Thus, there is a potential reputational risk to a bank operating under such an action. Formal actions ( except for written agreements) are enforceable in court.

Informal

Informal actions are used when a bank’s overall condition is sound, but it is necessary to obtain written commitments from a bank’s board of directors to ensure that identified concerns will be corrected. However, circumstances warrant a less-severe form of action than the formal actions.

Informal actions include:

memoranda of understanding (MOU),
board resolution and
commitments.

In most instances, the Federal Reserve has considerable discretion in which supervisory actions it pursues. However, in a limited number of circumstances, such as certain capital deficiencies, violations of the banking regulations relating to Bank Secrecy Act compliance or violations of the federal flood insurance requirements, the law requires the Federal Reserve to take specified formal supervisory actions.

In both informal and formal supervisory actions, directors play a key role in addressing identified problems and deficiencies. Directors adopt corrective actions, implement policies and procedures, and oversee management’s compliance with the policies and procedures. Additionally, most supervisory actions require periodic board reports to the bank’s regulator on progress in correcting problems and deficiencies and complying with the terms of the supervisory action. The Federal Reserve generally terminates a supervisory action when the bank returns to a satisfactory condition and is in full compliance with the action.

Conclusion

The Federal Reserve and state regulators share a common goal with bank directors and management. Regulators want a bank to be run safely and in full compliance with laws and regulations. When these goals are not met, the Federal Reserve and state regulators have a wide range of informal and formal supervisory actions they can use to correct deficiencies and problems. Additionally, the Federal Reserve can assess civil money penalties for violations of the terms of a formal supervisory action. In the event of non-compliance with a supervisory action, a bank or individual risks the possibility of more severe supervisory sanctions.