Wednesday, April 8, 2009

Is The Fed Telegraphing Stress Test Results?

On the Federal Reserve's web site there is a useful search feature (link here) that provides a listing of all "Enforcement Actions" the Fed has brought against bank holding company subsidiaries, after these have failed a bank exam or need to take further action in the Fed's opinion. In essence the Fed has been running micro stress tests for 2 decades: the Fed database goes back all the way to 1989.

Going through the list the first obvious thing is that the 39 enforcement actions already submitted in the first 3 months of 2009 surpass 2007's entire 34 and 2006's 28. Also, reading the enforcement letters indicates that the Fed's key concerns relate to capital (or the wasting thereof) and usually prohibit dividends, debt buybacks and require bank holding companies to come up with quick capital replenishment plans. Failure to comply with an action puts officers and directors personally at risk.

The list of the 5 most recent banks singled out for enforcement violations are:
  • United Security Bancshares, Inc., Woodstock, Georgia
  • Blossman Bancshares, Inc., Lacombe, Louisiana
  • Heritage Bank, Topeka, Kansas
  • Community Bankshares, Inc., Greenwood Village, Colorado; Community Banks of Colorado, Greenwood Village, Colorado
  • BankEast Corporation, Knoxville, Tennessee; BankEast, Knoxville, Tennessee
This list indicates that the Federal Reserve is already far ahead on the stress test curve, while the frequency of new Enforcement Actions can not possibly spark confidence in anyone who is overly optimistic for a favorable outcome of the Stress Test at the systemic level and could also be the reason for focusing on only the $100 billion+ sized banks, as the pain at the smaller banks can already be accessed using the service and is pervasive.
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Anonymous said...

all of the agencies post their formal enforcement actions -- which i track weekly. this is nothing new as the disclosure requirement was required after the last crisis (i think fdicia). the only real thing of note from the various sites is that so few institutions are subject to formal action. there are less than 300 institutions under a formal action for traditional safety & soundness issues. moreover, citi is not subject to any formal action or is it on the problem bank list.

the fdic finally listed citi as receiving open bank assistance last last year but does not count them in the narrow failed bank stats. they have not shown boa receiving open bank assistance yet. the fdic is misrepresenting the failed bank numbers. all of the agencies have not done enough issuing formal enforcement actions.

the fdic has a real sense of humor. it only releases it enforcement actions once a month; so the last known are through the end of february. with that release in february, the fdic issued an action against on february 9th to sherman county bank just in time to close them on february 13th. also, fdic issued an action on february 3rd against security savings bank only to close them on february 27th. someone needs to take the fdic to task on the failings of thier supervision division. issuing enforcement actions this close to failure shows the laxity in supervision.

Anonymous said...

Overall, Anon's April 8th comment is spot on. Hold the agencies accountable and require transparency in their dealings with all - not just those that do not pose systemic risk.

Having said that, keep in mind that formal enforcement actions such as the two cited (Sherman County and Security Savings) have been in the pipeline for months. Generally, speaking, a consent order is in the agency's hands, signed, sealed and delivered for at least 30 days before it is disclosed. Further, the document has been in the hands of the bankers in final or draft form for an additional 30 to 90 days as the banks review, comment and determine whether to sign the Stipulation or take it to court.

In the time that it takes to finalize the document and disclose it (up to four months - sometimes longer), banks and FDIC may still be hopeful of a resolution such as pre-receivership sale, capital injection, etc. As such, all parties move forward as if the bank will remain an ongoing concern.

It is not until the very last minute (about 4 to 5 weeks before bank closure - less in emergency situations) that the FDIC's Department of Receivership gets involved. By this time I suspect in these two cases, the signed formal documents have been logged into the disclosure queue and cannot be pulled out due to the legal processes put into place during the last crisis.

The result is a consent order initially delivered in November or December, appears to have been issued in February, just prior to closure. The facts are that the documents had been in the hands of the bankers for months and once in the legal queue, no way to get out unless changes are enacted which seem to be too much trouble than they are worth.