Financial Update (July-September 2001)


Cover Story

2000 Annual Report

Consumer Finance

Board Changes

Circular Letters

Identity Theft

Credit Scoring


Did You Know?

Data Bank

The Docket


Enforcement Actions Help Keep Banks Safe and Sound

Apolice officer directing traffic at a busy intersection is able to keep things flowing smoothly only when drivers know and follow traffic laws to avoid the penalties for breaking them. In a similar way, the banking industry is able to function smoothly only when banks and other depository institutions know the banking laws and the penalties for noncompliance.

Part of the Federal Reserve’s role is to respond appropriately when it determines that a state member bank or bank holding company has problems that affect the institution’s safety and soundness or is not in compliance with laws and regulations. In some cases, the Fed may need to take an informal supervisory action or a formal enforcement action, but often a bank will respond to the Fed’s initial report by addressing and correcting all identified problems. The Fed’s actions are designed to address concerns about a bank’s operations and to encourage banks and their affiliated parties to follow the law.

Most formal and informal enforcement actions are taken after the completion of an on-site examination, but the Fed can also take immediate action if it becomes aware of a problem at a bank that calls for attention and correction.

Part of the Federal Reserve’s role is to respond appropriately when it determines that a state member bank or bank holding company has problems that affect the institution’s safety and soundness.

Informal actions

Informal actions are imposed when circumstances warrant a less severe form of action. These actions are not enforceable and are not published or publicly available. There are several types of informal actions.

Commitments. A commitment is used to correct minor problems or to request periodic reports addressing certain aspects of a bank’s operations. Commitments are used when there are no significant violations of law or unsafe or unsound practices and when the bank and its officers and directors are expected to cooperate and comply.

Board resolutions. Board resolutions represent a number of commitments made by a bank’s directors. These commitments are incorporated into the bank’s corporate minutes.

Memorandums of understanding. This action involves highly structured written agreements that are signed by both the Reserve Bank and the bank’s board of directors. Memorandums of understanding are used when a bank has multiple deficiencies that the Fed believes can be corrected by the present management. The imposition of a memorandum of understanding may require disclosure to the Securities and Exchange Commission and to the bank’s liability bond issuer.

Formal actions

Formal supervisory actions are used to correct practices that regulators believe are unlawful, unsafe or unsound. There are various types of formal actions, including cease-and-desist orders, temporary cease-and-desist orders, written agreements, and removal and prohibition orders.

Cease-and-desist orders. The Federal Reserve Board uses its cease-and-desist authority when a bank or any institution-affiliated party, including both businesses or individuals, is violating, has violated or is about to violate a law, rule or regulation. In addition, a cease-and-desist order can cover a bank’s violation of a condition imposed in writing by the Board in connection with the granting of any application or any written agreement or in an unsafe or unsound practice in conducting the business of the institution. The Board must also initiate a cease-and-desist action when a bank has failed to establish Bank Secrecy Act procedures or has failed to correct any previously noted deficiencies related to these procedures.

Cease-and-desist orders may require the bank or person subject to the order to discontinue the practices or violations or take affirmative action to correct the violation or practices.

In general, if Board and Reserve Bank staff determine that a cease-and-desist order is warranted, the bank or individual is given an opportunity to consent to the issuance of the order without the need for the issuance of a notice of charges and an administrative hearing. If the parties voluntarily agree to settle the case by consenting to the cease-and-desist order, the proposed order will be presented to Board officials for ratification and formal issuance of the order, which then becomes final and binding.

If a bank or individual fails to consent to a cease-and-desist order, the Board may issue a notice of charges and of hearing, which contains a detailed statement describing the facts of the alleged violations or practices. Delivery of the notice begins a process that includes the convening of a public administrative hearing conducted before a Board-appointed administrative law judge. Following the hearing, the judge makes a recommendation to the Board. The Board then considers the recommendation and the proceeding and determines whether to issue a final cease-and-desist order.

The Fed’s actions are designed to address concerns about a bank’s operations and to encourage banks and their affiliated parties to follow the law.

Temporary cease-and-desist orders. The Fed Board also has the option of issuing a temporary cease-and-desist order against a bank or any institution-affiliated party.

This type of action can be taken when a bank’s solvency is harmed, the bank’s assets or earnings will be dissipated, or a bank’s conditions will be weakened by a violation or threatened violation of law, rule or regulation. In addition, when a bank is engaged in an unsafe or unsound practice specified in the notice of charges, the Board may, in conjunction with issuing a notice of charges, issue a temporary cease-and-desist order against the bank or any institution-affiliated party. A temporary cease-and-desist order may also be issued if a bank’s books and records are incomplete or inaccurate.

Although a temporary cease-and-desist order becomes effective immediately after it is served, the bank or individual has 10 days to appeal to a U.S. district court. Unless the court sets aside the order, the temporary cease-and-desist order stays in effect until the Board issues a final cease-and-desist order or dismisses the action.

Written agreements. A written agreement is a less severe formal supervisory action that must be approved by the Board’s director of banking supervision and regulation and its general counsel. The provisions of a written agreement may relate to any of the problems found at the bank or to any problems involving institution-affiliated parties.

Removal and prohibition orders. The Federal Reserve Board is authorized to remove any current institution-affiliated party of a bank for certain violations and misconduct. The Board can also permanently prohibit any current or former institution-affiliated party from future involvement with any insured depository institution, bank or thrift holding company, and nonbank subsidiary. A removal or prohibition order is issued either by the party’s consent or after an administrative process.

Penalties for violations

If the final order or written agreement in a formal action is violated, the Board may apply to a U.S. District Court for enforcement, and the court may order and require compliance from the bank or affiliated party. A civil money penalty may be assessed. These fines can range from $2,000 to $1 million per day.

Making it public

Since August 1989 the Federal Reserve Board has made all final enforcement orders public, and since November 1990 the Board has made all written agreements public. Formal enforcement actions taken before August 1989 are not public. Publicly available Board actions are posted on the Board’s Web site at