Are Regulators Getting Tougher on Banks or Just on Their Clients?


It is called a “memorandum of understanding.” But “memorandum” is from the Latin “to remember.” And here the essential part of the tale is deliberately forgotten – it has to do with the reasons for the nationalization of the Bank of Canada in 1938, and the terms of that nationalization that permitted the Government of Canada to do its capital financing from its own bank so that the interest – less handling expenses came back to it. All this is still valid and in our law books.

The provinces, too, are allowed generous borrowing quotas under the Bank of Canada Act, but the interest paid on it would go substantially not to the provinces since they are not shareholders of the central bank, but to Ottawa that is. But that could serve as the basis for friendly cooperation instead of the constant tensions between the two levels of government. And, oh, the municipalities, today the ultimate victims left saddled with the bulk of the unseemly cost of the speculative orgies of our banks, could do much of their essential capital financing under the provisions for “corporations” with the guarantee of either federal or a provincial government.

Of course, the net interest paid would always go to the BoC’s one shareholder the Government of Canada. But that could be negotiated in a friendly way rather than with the current hissing and grinding of teeth. And using double-entry or “Accrual Accountancy that that Crusading Order brought back almost a thousand years ago from the Holy land would record the progress of the arrangement.

Rather than that we get a tangle of bureaucratic measures from several offices that did little enough to prevent our deregulated, speculative banks from getting us into this mess, and are certain to be unable to lift us out of it.

The Wall Street Journal (31/07, “Regulators Are Getting Tougher on Banks” by Damian Paletta and Dan FitzPatrick) tells a tale couched in dense bureaucratese: “Federal regulators have escalated the number of wounded banks they have essentially put on probation, with some of the targeted banks complaining that the crackdown has been too harsh.

“The Federal Reserve and the Office of the Comptroller of the Currency, two of the primary US banking regulators, have issued more of the so-called memorandums of understanding so far this year than they did for all of 2008, according to data obtained from the agencies under Freedom of Information Act requests.

“At the current rate of at least 285 so far, the Fed, OCC, and Federal Deposit Insurance Corp, are on track to issue nearly 600 of the secret agreements for the full year, compared with 399 last year. Memorandums of understanding can force financial institutions to increase their capital, overhaul management or take other steps.”

Not in the Light of Day

Above all, what is hidden from the public eye? But are the bureaucrats who got the US and the world into this ever-deepening mess to be trusted, with what they are up to, to get them out of it?

“Such sanctions typically aren’t publicly disclosed to avoid possibly rattling depositors and shareholders. Institutions with memorandums this year range from Bank of America Corp, regional BancGroup Inc., based in Montgomery, Ala., to Berkshire Bancorp Inc., a New York bank with just 12 branches.

“The sharp increase comes as Congress considers changes proposed by the Obama administration that would overhaul the way the US government oversees banks. Many bankers and analysts believe those changes would result in an even more assertive regulatory apparatus. Regulators have been criticized for going too easy on banks and security firms. Many bankers and analysts believe those changes would result in an even more assertive regulatory apparatus. Regulators have been criticized for going too easy on banks and security firms.

“Regulators say that their tougher stand now could prevent some struggling banks from failing as borrowers fall behind on their payments and the US economy slog through recession. A total of 64 banks have failed this year, up from 25 in 2008.

“Regulators’ natural response is, ‘Oh my goodness, we’ve got to toughen up,’ Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said in an interview.

“Some bankers counter that the regulatory squeeze is making it even harder for them to make good loans that would help them recover. ‘Its frustrating and aggravating,’ said Pat Sheaffer chairman and CEO of Riverview Bancorp of Vancouver, Wash., which has $920 million in assets and 18 branches.

“In January, the Office of Thrift Supervision issued Riverview a memorandum of understanding that requires the bank to increase its total risk-based capital, a measurement of financial strength, to 12% from 10.7% as of December 31 Mr. Sheaffer said there was little dialogue with the agency before the requirement was imposed.

“The OTS didn’t return phone calls seeking comment.

“James Miller Jr., CEO of Fidelity Southern Corp., said he was surprised to be hit with a memorandum of understanding in December because the Atlanta bank’s exposure to residential real estate is low in comparison to others in the area.

“Regulators want Fidelity to reduce its residential real-estate construction lending to no more than 100% of total capital, down from about 120%. Since the agreement, the bank has lowered its exposure to 110%.

“‘I am not about to say anything about my regulators,’ Mr. Miller said. The bank got $483 million in capital from the taxpayer-funded Troubled Asset Relief Program right after it signed the memorandum. ‘I concluded that regulators were satisfied with how we were running our bank,’ he added. In the past, the bank has faced criticism that its regulation was too uneven, with examiners in some areas of the US accused of being too easy on banks, while examiners in others were much tougher.

There is an awful lot of talk among bankers that…8, 10 and 12% will be targets FDIC will want to see going forward, even for healthy banks,’ said Ted Awerkamp, CEO known as Tier 1 capital, Tier 1 risk-based capital and total risk-based capital. The Quincy, Ill., bank holding company entered a memorandum with the Fed earlier this year.”

Memorandums of understanding can lead to sterner, public sanctions if a bank is seen as not doing enough to correct problems.


– from Economic Reform, September 2009