If you're going to try it, try it for the right reasons
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Why is the federal regulatory examination appeals process not so appealing? Read on.
Appeals only go so far
Both FDIC and the Comptroller's Office, within the recent past, have reminded banks of their ability to appeal Material Supervisory Determinations as contained in their examination reports.
What is a "material supervisory determination," you might ask?
Basically, what it sounds like. Any rating received on a component of the CAMELS rating system: Capital, Assets, Management, Earnings, Liquidity and Sensitivity; any legal violation; any request by the regulator that the bank increase its allowance for loan and leases losses; any significant loan classification; the CAMELS composite rating; and the like.
There have not been that many appeals over the last three years, while the industry has been through this unmitigated economic disaster. That's primarily because under each of the agencies' appeal systems, the bank's right to appeal any part of the examination is terminated as soon as the agency utters the words "formal enforcement action."
The theory behind this provision in the appeals process is that the bank has a right to an administrative hearing in a formal enforcement action, so there is no reason to appeal.
Frankly, until the federal regulators clarified that, one strategy we often employed for our community banks, when they were faced with an enforcement action, was to appeal the results of the exam. If the appeal was successful, then the underpinnings of the enforcement action would be eliminated. The response to our firm's efforts in this regard (and undoubtedly some others) was that the federal regulators changed the process, so now you cannot appeal if you are faced with a formal enforcement action.
Only the good can appeal?
The result of the regulatory position that no appeal is available if a formal enforcement action is proposed by the federal regulators is that it leaves the only likely appellants as banks that are rated 1, 2, or 3.
Now, it is highly unlikely that a 1-rated bank would want to go to the expense of filing an appeal. (And, yes, there are some 1-rated banks today.)
So, as a result, the real appeals process is only for a bank that thinks it should be rated a 2 and is rated a 3 under the CAMELS rating system.
Why bother, then?
What is the big difference, you might ask?
That is certainly an appropriate question to ask. If the big difference is the examiners hurt the CEO's or the Board's feelings because the bank should have been rated a 2, not a 3, then the bank is wasting its time and money filing an appeal.
The real analysis should be of economic issues.
What is the difference in federal deposit insurance premiums between a CAMELS 2 rating for your bank and a CAMELS 3 rating? The answer, probably a lot.
When you receive your next safety and soundness examination, consider whether it is appropriate to appeal. Consider it, however, from the perspective of economic impact on the bank of the action of the regulators versus emotional impact on the board or management.
In subsequent blogs, I will address the mechanics of how the bank actually files the appeal and how the board addresses the likely probability of success.
Stay tuned!
About the Author
Gerrish formerly served as Regional Counsel for the Memphis Regional Office of the FDIC, with responsibility for all legal matters, including cease-and-desist and other enforcement actions. Before coming to Memphis, Gerrish was with the FDIC Liquidation Division in Washington, D.C. where he had nationwide responsibility for litigation against directors of failed banks.
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Gerrish can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it , and the firm’s website, www.gerrish.com.
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