Over the near-unanimous objection of banks, the Federal Deposit Insurance Corp. yesterday approved a policy of making public its disciplinary actions against financial institutions, effective next Jan. 1.
For the first time, the FDIC will disclose in a systematic way information about abusive insider dealings, use of brokered funds to engage in speculative loans, inadequate capital and incompetent or corrupt management. The FDIC plans to alert the media to enforcement actions, including cease-and-desist actions, removal or suspension of officers and directors, civil fines and capital directives.
FDIC Chairman William Isaac said he believes that "better disclosure will result in a stronger, more stable banking system with fewer and less costly failures." Isaac long has pushed for more public accountability by financial institutions.
He went on to note that "meaningful disclosure is one of the best protections available to the vast majority of banks that are prudently operated." He said this was particularly true "in a deregulated-interest-rate environment, in which deposits tend to flow to the highest bidder -- often a troubled bank or thrift."
Some 8,500 banks will be affected by the new FDIC policy. The Office of the Comptroller of the Currency is working on an even broader regulation for national banks. However, that policy could change if the successor to former comptroller C. Todd Conover, who resigned last week, adopts a more conciliatory approach toward the banks that the office regulates.
Isaac said yesterday that, of the 665 banks commenting on the proposal set out in February, only 23 small banks favored it. The other banks argued that disclosure would erode public confidence in the banking system or could lead to runs on weak banks. Several threatened to sue the FDIC to stop the regulation from taking effect. Isaac dismissed their arguments, saying they had voiced similar objections two years ago to disclosure of nonperforming loans and no dire consequences had ensued.
In an attempt at conciliation, the FDIC agreed not to release information on informal actions, or so-called memoranda of understanding. Informal actions deal with the same kinds of problems as the other enforcement actions, but are of a lesser magnitude.