Bank Director's Training

This section describes the Federal Reserve’s perspective and approach to addressing and resolving supervisory concerns. These concerns include problems, deficiencies, and violations of law that may arise with state member banks. Many of these principles and supervisory actions also apply to bank holding companies.

Bank directors and management share a mutual interest with the Federal Reserve and the bank’s state regulator in seeing that the bank operates in a safe and sound manner and in compliance with all applicable laws. Through diligence and hard work, most banks achieve these goals. However, even in well-run banks, there may be instances when operational and compliance issues prevent full achievement of these mutual goals. In rare instances, these goals may be completely compromised and the bank may fail or seriously violate the law.

Generally, problems or deficiencies at a bank are identified by Reserve Bank or state examiners during on-site examinations. Most problems or deficiencies are resolved informally during the course of the examination, through discussions with bank management and directors. The bank immediately takes steps to correct, or commits to promptly correct, the problems or deficiencies and addresses the regulatory concerns. Some problems or deficiencies, however, may not be as easily addressed, especially if they are serious, pervasive, or repeat. In such cases, the Federal Reserve or state regulator may take supervisory action.

This section describes the range of supervisory actions that the Federal Reserve may take to address problems or deficiencies at a bank, and the range of actions that may be taken against the bank’s management, directors, or other institution-affiliated parties. State banking regulators have similar authority to take supervisory action, and often take supervisory action 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.

Most problems or deficiencies that examiners identify during their bank examination are addressed by discussions with management. This may happen during the examination process or at the meeting examiners hold with bank management and directors after the examination ends. Issues of concern and recommendations are also summarized in the written report of examination. In general, if the examiners are reasonably assured of management’s ability to promptly correct the identified problems, deficiencies, or other regulatory concerns, no further supervisory action is taken. Please remember that the Federal Reserve considers its examination findings to be confidential supervisory information that may not be disclosed to anyone outside the bank except in compliance with the Federal Reserve Board’s disclosure rules.

Some problems, however, are not easily corrected during the examination. In those cases, informal or formal supervisory action may be necessary. The most important step that directors and management can take in resolving the problems or deficiencies identified by the examiners is to cooperate with Reserve Bank staff and engage in productive discussions toward effective solutions. All informal and nearly all formal supervisory actions are taken with the bank’s consent; that is, the bank agrees to the measures and does not contest the action.

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 Federal Reserve is required by law 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 supervisor on the bank’s progress in correcting problems and deficiencies and complying with the terms of the supervisory action.

Supervisory actions are generally remedial and treat problems or deficiencies identified at the examination that the bank needs to correct. In some instances, a bank may need to ask outside consultants to assist in remedying the problems or deficiencies. A bank also may consult its outside counsel when considering its response to a proposed supervisory action. The Federal Reserve generally terminates a supervisory action when the bank is in satisfactory condition and in full compliance with the action after the remedial measures have been adopted, implemented and audited.

The following presents information on informal and formal actions used by the Federal Reserve. The list is not exhaustive, but describes the most common types of actions. The list is also not intended to be a precise legal description, but is provided for general guidance. The specific requirements for supervisory actions are set forth in the applicable laws and regulations. The presentation does not include actions that may be taken against a bank or an individual by federal or state law enforcement agencies for violations of criminal law.

Informal supervisory actions are used to address less significant deficiencies or problems that the Reserve Bank believes current management can quickly correct. Informal actions are always taken with the bank’s consent. Informal actions are not enforceable in a court of law, are not generally published or made publicly available by the Federal Reserve, and are considered to be confidential supervisory information. Informal actions generally fall within four categories. A Reserve Bank’s determination as to which action to use is based on individual facts and circumstances, including the severity, number or repeat nature of the problems or deficiencies:

Formal supervisory actions are used to address deficiencies or problems, including unsafe or unsound practices and violations of law or regulation, that are significant, pervasive, or repeat, or that cannot be promptly corrected by the bank’s management. Formal actions may be taken against a bank or against an officer, director, employee or other institution-affiliated party of the bank. In some instances, formal actions are required by law. In the event of noncompliance, the Federal Reserve may apply to a federal court to enforce any final order issued against a bank or an individual.

As required by law, all final orders and written agreements are published and available to the public unless the Federal Reserve Board, in its discretion, determines the publication would be contrary to the public interest. Copies of all such actions taken by the Federal Reserve since 1997 are posted on the Federal Reserve Board’s public website.

Formal supervisory actions are drafted by the Federal Reserve. Banks and individuals generally consent to formal supervisory actions. In circumstances where a bank or individual does not consent to an action, the Federal Reserve Board may issue a “notice of charges and of hearing” to initiate a formal hearing process. The notice of charges details the facts underlying the alleged deficiencies, violations, or unsafe or unsound practices and outlines the remedial actions sought by the Federal Reserve. This is a formal legal proceeding and a bank or individual should consult with a qualified lawyer regarding the bank’s or individual’s legal obligations and options and the advisability of retaining counsel. The hearing on the charges is held before an administrative law judge, who issues a recommended decision. The decision is reviewed by the Federal Reserve Board, which may issue a final decision on the matter. Both the notice of charges and the hearing itself are public, unless the Federal Reserve Board determines that an open hearing would be contrary to the public interest. The bank or individual may appeal an adverse order issued after a contested action to the appropriate federal court of appeals.

Two common formal supervisory actions requiring a bank to take remedial measures are a written agreement and a cease-and-desist order:

A written agreement or a cease and desist order generally includes provisions that specifically address the violations, deficiencies, or unsafe or unsound practices. They may require the bank to stop certain actions or to take affirmative action. Some provisions may require a bank to submit plans, policies, or procedures that are acceptable to the Federal Reserve and, if the action is issued jointly, to the state regulator.

May be assessed by the Federal Reserve Board against a bank under various federal banking laws. The penalty amounts may range from $2,200 per day to up to $1.25 million for each day that the infraction remains outstanding. A civil money penalty is assessed by the Federal Reserve Board, most often with the bank’s consent, based on a critical analysis of the facts and circumstances of the case and comparison with amounts assessed in other cases. The analysis also includes consideration of any mitigating factors that are required to be taken into account by law, such as:

financial resources of the bank,
good faith of the bank,
gravity of the violation,
history of previous violations, and
such other matters as justice may require (i.e., other mitigating factors).

Under the Federal Reserve’s regulations that implement the National Flood Insurance Act, a state member bank may not make or renew a loan secured by real estate in a designated flood hazard area unless the property is covered by flood insurance. The Federal Reserve must assess a civil money penalty against a bank that is found to have engaged in a pattern or practice of violating the flood insurance requirement. The penalty amount may be up to $385 for each violation. Each loan made or renewed in violation of the law is generally considered to be a separate violation.

Is effective immediately and may be issued with or without the bank’s consent. The provisions are narrowly focused to address the cause of immediate harm to the bank. A temporary cease and desist order may be issued when the Federal Reserve Board determines that:

a violation or threatened violation, or unsafe or unsound practice is likely to cause the bank’s insolvency or significant dissipation of the bank’s assets or earnings, weaken the bank’s condition or otherwise prejudice the depositors’ interests; or
the bank’s books and records are so incomplete or inaccurate that the Federal Reserve Board is unable to determine or ascertain, through the normal supervisory process, the bank’s financial condition or the details of a transaction that may have a material effect on its condition.

The Federal Deposit Insurance Act places mandatory restrictions on any bank that fails to remain at least adequately capitalized and requires that regulators take action against a bank that is significantly undercapitalized or critically undercapitalized. For example, any bank that is less than adequately capitalized cannot pay dividends and must submit a capital restoration plan that is acceptable to the regulator. Additional mandatory restrictions apply to significantly and critically undercapitalized banks. Regulators may also take several discretionary actions when the bank is less than adequately capitalized.

Formal supervisory actions may be taken against officers, directors, employees, and other individuals who participate in the bank’s affairs (institution-affiliated parties). These actions include:

Provisions may limit the individual's activities at the bank, require the individual to take affirmative action, or make restitution or reimbursement to the bank if the individual was unjustly enriched by the violation or practice or demonstrated reckless disregard for the law. For example, an insider may be unjustly enriched by accepting loans in violation of the restrictions in Regulation O. An insider may demonstrate reckless disregard for the law by knowingly approving loans in excess of the state lending limit. Cease and desist orders are most often issued with the consent of the individual.

The Federal Reserve may remove any current institution-affiliated party from the bank for violations of law and other misconduct and prohibit any current or former institution-affiliated party from further participation in the banking industry. A removed or prohibited individual may not serve as an officer, director, or employee of a bank, bank holding company, or other federally regulated financial institution; acquire shares of a financial institution; or exercise certain shareholder rights without prior regulatory approval.

To support a removal and prohibition order, in addition to determining that the individual involved has engaged in a violation of law or regulation or in other specified misconduct, the Federal Reserve must determine that the misconduct the individual has engaged in has caused, or will probably cause, loss to the bank or resulted in gain to the individual and that the individual has demonstrated continuing or willful disregard for the safety and soundness of the bank or the individual’s action involved personal dishonesty.

Although most removal and prohibition orders are issued by consent, the individual may contest the proposed action through a legal proceeding. As outlined in the Federal Reserve Rules of Practice for Hearings, the Federal Reserve Board initiates the proceeding by issuing a "notice of intention to remove or prohibit." The notice details the grounds for removal or prohibition, in other words, the facts underlying the alleged violations or unsafe or unsound practices in which the individual engaged, and orders a hearing on the charges. The individual may be represented by an attorney throughout the proceeding. The hearing is held before an administrative law judge, who issues a recommended decision. The recommended decision is reviewed by the Federal Reserve Board, which may issue a final order on the matter. Both the notice and the hearing itself are usually public. The individual may appeal an adverse order issued in a contested action to the appropriate federal court of appeals.

The Federal Reserve may suspend from a bank a current institution-affiliated party who is subject to a notice of intent to remove or prohibit if the Federal Reserve determines that the party’s conduct meets the standard for removal and that a suspension is necessary to protect the bank or its depositors. A suspension order is immediately effective upon being served and remains in effect until the proceeding on the notice of charges is resolved, unless stayed by a court.

May be assessed by the Federal Reserve against an individual under various federal banking laws. The penalty amounts can range from $2,200 per day to up to $1.25 million per day for each day that the infraction remains outstanding. A civil money penalty is assessed by the Federal Reserve Board based on a critical analysis of the facts and circumstances of the case and comparison with amounts assessed in other cases. The analysis also includes consideration of the mitigating factors that are required by law, such as:

financial resources of the individual,
good faith of the individual,
gravity of the violation,
history of previous violations and
such other matters as justice may require.

Being placed under a supervisory action is a serious matter that requires immediate attention and action. The timeframe for compliance depends upon the nature of the problems addressed in the action.

Compliance with supervisory actions generally entails considerable effort and expense. Bank directors under supervisory actions may need to more closely oversee management’s implementation of the actions taken to correct the problems, deficiencies or violations. Here are some basic steps that need to be taken to help ensure compliance:

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.