FDIC Directs Two Illinois Banks To Immediately Raise More Capital – Illinois Leads Nation in Bank Failures

BanksThe FDIC issued a list of 31 administrative enforcement actions taken against banks and individuals during April 2014.  The enforcement actions include the following:

  • 2 consent orders
  • 2 prompt corrective action directives
  • 12 orders terminating consent and cease and desist orders
  • 1 civil money penalty
  • 3 section 19 orders

The most serious enforcement actions are consent orders and prompt corrective actions directives.

A Prompt Corrective Action Directive (PCAD) is the most serious action that can be taken against a bank and requires immediate corrective action to be taken by the bank.  Typically, a PCAD issued to a bank is a strong indicator of imminent failure.

FDIC guidelines on issuing a PCAD state that “Prompt corrective action is a framework of supervisory actions for insured depository institutions which are not adequately capitalized. These actions become increasing severe as an institution falls within lower capital categories.”

The two PCAD issued in April were issued against State Bank of Herscher, Herscher, Illinois and Highland Community Bank, Chicago, Illinois.  Both banks have a very high troubled asset ratio of over 100%.  Historically, once a bank has a troubled asset ratio in excess of 100%, failure of the bank becomes almost inevitable.

In March the FDIC issued a PCAD against Columbia Savings Bank, Cincinnati, Ohio, and the bank was subsequently closed by regulators on May 24, 2014.

If the two Illinois banks issued PCADs fail, Illinois will cement its position as the state with the largest amount of failed banks.  As of May 30, 2014, two out of the nine banking failures to date were in Illinois.

Consent orders are issued to banks considered to be operating in an unsafe and unsound manner and is one of the most serious regulatory actions that can be taken against a bank under Section 8 of the Federal Deposit Insurance (FDI) Act.

The two consent orders issued by the FDIC in April were against the following banks:

  • Grant County Deposit Bank, Williamstown, Kentucky
  • GSL Savings Bank, Guttenberg, New Jersey

Section 19 orders issued under the provisions of Section 19 of the FDI Act are issued by the FDIC to prohibit any person convicted of “any criminal offense involving dishonesty or breach of trust” from participating in the control or management of an FDIC insured institution.

Civil money penalties are assessed against banks or individuals found to be in violation of various rules and regulations.

Removal and prohibition orders are usually taken by regulators against individuals who have committed “violations of law or regulations, unsafe or unsound banking practices, and/or breach of fiduciary duty.”  An individual issued a removal and prohibition order is banned from any further participation in the affairs of any financial institution insured by the FDIC.

Despite the improvement in the overall health of the banking industry, there are still 411 banks listed on the FDIC’s confidential Problem Bank List at March 31, 2014, representing 6.1% of all FDIC insured institutions.  Problem banks typically have outstanding regulatory enforcement actions issued against them.

PBL MARCH 2014The entire list of FDIC enforcements actions for April can be viewed at FDIC Enforcement Decisions and Orders.

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