Consequences of Noncompliance with Laws and Regulations

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. Regulators generally terminate a supervisory action when the bank returns to a satisfactory condition and is in full compliance with the action.

Banks that lack a good compliance risk management system, or have one with material flaws, may be exposed to the following consequences:

  • Violations of Banking Laws or Regulations
  • Violations may be indicative of a pattern or practice and are considered potential areas of concern. The pattern or practice could lead to monetary penalties, supervisory actions and/or reputational risk for bank management.

  • Monetary Cost
  • This can come from employee time spent on file searches requested by regulators trying to determine the extent of a violation or from hiring a consultant to fix a problem. Other monetary costs can include civil money penalties (CMP), reimbursements or restitutions, depending on the violation of law or regulation.

  • Enforcement Supervisory Actions
  • Regulators may take action to correct specific problems identified at a bank. Actions typically specify what the bank needs to do to correct identified problems, such as improving lending practices, instituting proper policies and procedures, or correcting specific violations of law. They may be formal, meaning they are legally enforceable, or informal.

  • Reputational Risk/Damaged Reputation
  • Failure to comply with laws and regulations can affect a bank’s reputation in a couple of ways. First, violations often involve some kind of error requiring contact and disclosure with customers. If errors occur frequently, customers will soon have the word out to the community that the bank does not operate effectively.

    Second, if the violations necessitate the use of a formal enforcement action, those actions are public information, disseminated by the regulators and available on their respective regulatory websites. Again, news of a bank’s inefficient operations may be widely communicated and known to the public via customer word of mouth.

In most cases, issues identified by the examiners are resolved through discussions with bank management or management’s response to the report of examination. For more severe issues, the banking regulators use the aforementioned enforcement actions. The terms "administrative action" or "supervisory action" are often used synonymously with "enforcement action."

Enforcement actions are used when something more than routine examination follow up is considered necessary to address a bank’s issues, such as violations of law, rules, or regulations; unsafe and unsound practices; and breaches of fiduciary duty. Actions may be formal, meaning they are legally enforceable in the federal courts, or informal. Informal actions include:

  • board resolutions;
  • commitment letters; and
  • memoranda of understanding.

Informal actions are the least severe of the various supervisory actions available to regulators. They are usually used for issues that, while considered substantive, can be corrected relatively easily due to management’s cooperation and ability to effect corrective action.

Formal actions are for more severe problems, including failure to comply with informal enforcement actions. Formal actions include:

  • written agreements;
  • consent orders;
  • cease and desist orders (C&D);
  • capital directives;
  • prompt corrective action directives;
  • safety and soundness directives;
  • civil money penalties (CMPs); and
  • prohibition and removal actions.

Failure to adequately respond to an enforcement action can result in the escalation of enforcement actions to more severe actions, such as CMPs. CMPs are typically levied against banks or responsible individuals for egregious or repetitive conduct, which can include ineffective corrective action taken in response to an enforcement action.

Prompt Corrective Action Bank Standards

Banks that are insured by the FDIC are subject to Prompt Corrective Action (PCA) standards under FDICIA. The PCA standards are based on regulatory capital requirements, but are a separate regulation. The PCA system uses bank capital levels to trigger supervisory actions designed to quickly correct banking problems. Reference the Capital lesson for additional information.