Bank capital regulation by enforcement: An empirical study

Indiana Law Journal

Volumn 87, Issue 2, 2012, Pages 645-708

  Hill, Julie Andersen ^a  

^a UNIVERSITY OF HOUSTON   (United States)

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EID: 84863419923     PISSN: 00196665     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (391)

1. Robin Sidel, Sterling Bancshares Puts Itself on Block, WALL ST. J., Jan. 14, 2011, at C1. As used in this Article, the term "bank" refers to federally insured commercial banks and thrifts. It does not include credit unions, foreign banks, bank holding companies, financial holding companies, or investment banks.
2. See Joe Adler, How Many to Fail; Do We Hear 1, 000?, AM. BANKER, Mar. 23, 2009, at 1;
3. John R. Engen, M&A in 2010: The Year of the No-Frill Deal, BANK DM., Jan. 1, 2010, at 38.
4. David Leonhardt, Heading Off the Next Financial Crisis, N. Y. TIMES MAG., Mar. 28, 2010, at 36.
5. See Cheyenne Hopkins, Regulatory Revamp Newest Plank in Obama's Platform, AM. BANKER, Mar. 28, 2008, at 1 (noting President Barack Obama's support for capital regulation reform).
6. 12 U. S. C. S. § 5371 (LexisNexis 2010). The new capital requirements cannot be lower than the existing bank capital requirements and must address "the risks that the activities of such institutions pose, not only to the institution⋯ but to other public and private stakeholders in the event of adverse performance, disruption, or failure of the institution. "
7. John Walsh, Acting Comptroller of the Currency, Remarks at the Exchequer Club (Jan. 19, 2011), available at http://www.occ.treas.gov/news-issuances/ speeches/2011/pubspeech-2011-5.pdf (noting that "notice of proposed rulemaking to implement [new capital] standards is just getting underway and final rules lie well into the future");
8. Oversight of Dodd-Frank Implementation: A Progress Report by the Regulators at the Half-Year Mark: Hearing Before the S. Comm. on Banking, Hous., and Urban Affairs, 112th Cong. 47 (2011) (written testimony of Sheila C. Bair, Chairman, FDIC) ("[T]he banking agencies are⋯ developing rules to implement Basel III proposals for raising the quality and quantity of regulatory capital⋯"). The new rules will be informed by Basel III, an international framework for regulating capital at internationally active banks.
9. See generally BASEL COMM. ON BANKING SUPERVISION, BASEL HI: INTERNATIONAL FRAMEWORK FOR LIQUIDITY RISK MEASUREMENT, STANDARDS AND MONITORING (2010), available at http://www.bis.org/publ/bcbsl88.pdf. However, because Basel III focuses on internationally active banks, U. S. regulators retain significant autonomy in the development of capital regulation for the thousands of U. S. banks that are not internationally active. Walsh, supra.
10. George G. Kaufman, Capital in Banking: Past, Present and Future, 5 J. FIN. SERVICES RES. 385, 385 (1991).
11. RICHARD SCOTT CARNELL, JONATHAN R. MACEY & GEOFFREY P. MILLER, THE LAW OF BANKING AND FINANCIAL INSTITUTIONS 252-53 (4th ed. 2009).
12. 12 U. S. C. § 1818 (b) (1) (2006).
13. See Jean-Charles Rochet, Rebalancing the Three Pillars of Basel II, FRBNY ECON. POL'Y REV., Sept. 2004, at 7.
14. See Robert Reilly & Aaron Rotkowski, The Discount for Lack of Marketability: Update on Current Studies and Analysis of Current Controversies, 61 TAX LAW. 241, 265 (2007) (discussing the potential accounting, legal, administrative, and underwriting costs associated with raising external capital).
15. STEPHEN G. CECCHETTI, MONEY, BANKING, AND FINANCIAL MARKETS 102-03 (2d ed. 2006).
16. Patricia A. McCoy, The Moral Hazard Implications of Deposit Insurance: Theory and Evidence, in 5 CURRENT DEVELOPMENTS IN MONETARY AND FINANCIAL LAW 417, 422 (Int'l Monetary Fund Legal Dep't ed., 2008).
17. See generally Sandra L. Ryon, History of Bank Capital Adequacy Analysis (FDIC Working Paper No. 69-4, 1969) (discussing historical development of bank capital requirements in the United States).
18. About the OCC, OCC, http://www.occ.treas.gov/aboutocc.htm.
19. BD. OF GOVERNORS OF THE FED. RESERVE SYS., THE FEDERAL RESERVE SYSTEM: PURPOSES & FUNCTIONS 59-60 (9th ed. 2005).
20. Who is the FDIC?, FDIC http://www.fdic.gov/about/learn/symbol/ WhoistheFDIC.pdf. The FDIC has backup regulatory authority for all other banks that are federally insured.
21. See Functions and Responsibilities of the Director of the Office of Thrift Supervision, 12 C. F. R. § 500. 1 (2009).
22. 12 U. S. C. S. §§ 5401-52 (LexisNexis 2010).
23. The Basel Committee on Banking Supervision has identified three "pillars" of capital regulation: "minimum capital requirements, supervisory review, and market discipline." BASEL COMM. ON BANKING SUPERVISION, INTERNATIONAL CONVERGENCE OF CAPITAL MEASUREMENT AND CAPITAL STANDARDS: A REVISED FRAMEWORK 2 (2006) (comprehensive version), available at http://www.bis.org/publ/bcbsl28.pdf. Discussion of the role of market discipline and public disclosures is beyond the scope of this Article.
24. 12 C. F. R. § 325.2 (m) (2011) (FDIC);
25. C. F. R. pt. 208, app. B (Federal Reserve);
26. C. F. R. §§ 3. 6, 6.2 (d) (OCC);
27. C. F. R. §§ 565. 7, 567.5 (a) (OTS).
28. See BLACK'S LAW DICTIONARY 926 (8th ed. 2004) (defining "leverage" as "[t]he ratio between a corporation's debt and its equity capital").
29. "Goodwill is an intangible asset that represents the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed." 12 C. F. R. pt. 208, app. A.
30. 12 C. F. R. § 325. 2 (FDIC);
31. C. F. R. § 208.41 (Federal Reserve);
32. C. F. R. § 6. 2 (g) (OCC);
33. C. F. R. § 565. 2 (0 (OTS).
34. See BASLE COMM. ON BANKING SUPERVISION, INTERNATIONAL CONVERGENCE OF CAPITAL MEASUREMENT AND CAPITAL STANDARDS (1988), available at http://www.bis.org/pubUbcbs04a.pdf.
35. 12 C. F. R. pt. 325, app. A (FDIC);
36. C. F. R. pt. 208, app. A (Federal Reserve);
37. C. F. R. pt. 3, app. A (OCC);
38. C. F. R. § 567. 6 (a) (1) (OTS). There are minor differences in the way regulators classify some items.
39. See Joint Report: Differences in Accounting and Capital Standards Among the Federal Banking Agencies, 75 Fed. Reg. 47, 900 (Aug. 9, 2010).
40. 12 C. F. R. pt. 325, app. A (FDIC);
41. C. F. R. pt. 208, app. A (Federal Reserve);
42. C. F. R. pt. 3, app. A (OCC);
43. C. F. R. § 567. 6 (a) (2) (OTS).
44. 12 C. F. R. pt. 325, app. A (FDIC);
45. C. F. R. pt. 208, app. A (Federal Reserve);
46. C. F. R. pt. 3, app. A (OCC);
47. C. F. R. § 567. 6 (OTS).
48. 12 C. F. R. pt. 325, app. A § I. A (FDIC);
49. C. F. R. pt. 208, app. A § II (Federal Reserve);
50. C. F. R. pt. 3, app. A § 2 (a) (OCC);
51. C. F. R. § 567. 5 (OTS).
52. 12 C. F. R. § 325. 2 (w) (FDIC);
53. C. F. R. § 208. 41 (h) (Federal Reserve);
54. C. F. R. § 6. 2 (i) (OCC);
55. C. F. R. § 565. 2 (h) (OTS).
56. 12 C. F. R. pt. 325, app. A § LA (FDIC);
57. C. F. R. pt. 208, app. A § II (Federal Reserve);
58. C. F. R. pt. 3, app. A § 2 (a) (OCC);
59. C. F. R. § 567. 5 (OTS).
60. 12 C. F. R. pt. 325, app. A § LA (FDIC);
61. C. F. R. pt. 208, app. A § II. A.2 (Federal Reserve);
62. C. F. R. pt. 3, app. A § 2 (c) (2) (i) (OCC);
63. C. F. R. § 567. 5 (c) (1) (OTS).
64. 12 C. F. R. § 325. 2 (y) (FDIC);
65. C. F. R. § 208.410) (Federal Reserve);
66. C. F. R. § 6.2 (k) (OCC);
67. C. F. R. § 565. 20) (OTS).
68. The capital ratios for each classification are established by regulation. 12 C. F. R. §§ 325. 3, 325.103 (FDIC);
69. C. F. R. § 208.43 (Federal Reserve);
70. C. F. R. § 6. 4 (OCC);
71. C. F. R. § 565. 4 (OTS). In order to be well capitalized or adequately capitalized, a bank must meet or exceed the required percentage for each ratio. A regulator can downgrade a bank to the next lower capital category if the bank is in an unsafe or unsound condition.
72. U. S. C. § 1831o (g) (2006).
73. In addition to the requirements listed in Figure 1, thrifts are required to maintain tangible capital (similar to tangible equity capital, but excluding noncumulative perpetual preferred stock) "equal to at least 1.5% of adjusted total assets." 12 C. F. R. § 567. 9. This capital requirement "has effectively been eclipsed by the more stringent" capital requirements.
74. OTS, EXAMINATION HANDBOOK § 120. 3 (2009), available at http://www.ots.treas.gov/-files/422017.pdf.
75. A bank is adequately capitalized if it has a 3% leverage ratio and it "is not anticipating or experiencing significant growth and has well-diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and in general is considered a strong banking organization, rated composite 1 under the Uniform Financial Institutions Rating System." 12 C. F. R. § 325. 3 (b) (1) (FDIC).
76. 12 U. S. C. § 1831 f (a).
77. 12 C. F. R. pt. 325, app. D § 21 (FDIC);
78. C. F. R. pt. 208, app. F § 21 (Federal Reserve);
79. C. F. R. pt. 3, app. C § 21 (OCC);
80. C. F. R. pt. 567, app. C § 21 (OTS).
81. Risk-Based Capital Standards: Advanced Capital Adequacy Framework-Basel II, 72 Fed. Reg. 69, 288, 69, 293, 69, 403 (Dec. 7, 2007)
82. (codified at 12 C. F. R. pt. 3;
83. C. F. R. pts. 208, 225;
84. C. F. R. pt. 325;
85. C. F. R. pts. 559, 560, 563, 567);
86. BASEL COMM. ON BANKING SUPERVISION, INTERNATIONAL CONVERGENCE OF CAPITAL MEASUREMENT AND CAPITAL STANDARDS: A REVISED FRAMEWORK (2004), available at http://www.bis.org/publ/bcbs 107.pdf.
87. Victoria Tozer-Pennington, Dodd-Frank Slows Down Full Implementation of Basel II, FX WEEK (Nov. 25, 2010), http://www.fxweek.com/fxweek/news/1900819/ dodd-frank-slows-implementation-basel-ii;
88. see also Risk-Based Capital Standards: Advanced Capital Adequacy Framework-Basel II, 76 Fed. Reg. 37, 620, 37, 621 (June 28, 2011)
89. (to be codified at 12 C. F. R. pt. 3;
90. C. F. R. pts. 208, 225;
91. C. F. R. pt. 325) (noting that "[t]o date, no U. S.-domiciled banking organization has entered a transitional floor period and all U. S.-domiciled banking organizations are required to compute their riskbased capital requirements using the general risk-based capital rules").
92. Risk-Based Capital Standards: Advanced Capital Adequacy Framework-Basel II, 76 Fed. Reg. at 37, 626-29.
93. See Benton E. Gup, Introduction to the Basel Capital Accords, in THE NEW BASEL CAPITAL ACCORD 1, 8 (Benton E. Gup ed., 2004).
94. The market risk capital requirements apply only to banks "whose trading activity⋯ equals⋯ 10% or more of total assets [or is] $1 billion or more."
95. C. F. R. pt. 325, app. C (FDIC);
96. C. F. R. pt. 208, app. E (Federal Reserve);
97. C. F. R. pt. 3, app. B (OCC).
98. See GEN. ACCOUNTING OFFICE, RISK-BASED CAPITAL: REGULATORY AND INDUSTRY APPROACHES TO CAPITAL AND RISK 9 (1998) (stating that the market risk capital requirement "generally pertains only to the largest 15 to 20 U. S. banks with extensive trading activity");
99. Arthur E. Wilmarth, Jr., The Transformation of the U. S. Financial Services Industry, 1975-2000: Competition, Consolidation, and Increased Risks, 2002 U. ILL. L. REV. 215, 345 n. 543 (2002) (stating that the market risk capital requirement applies "to about twenty large banks"). Thrifts are not subject to market risk capital requirements.
100. See James J. Croke, What Banks Need to Know About New Developments in Asset-Backed Commercial Paper, 121 BANKING L. J. 218, 284 n. 9 (2004).
101. 12 U. S. C. § 3907 (a) (2) (2006);
102. see also 12 U. S. C. § 1464 (s) (2) (2009) (stating that "[m]inimum capital levels may be determined by [the OTS] Director case-by-case").
103. 12 C. F. R. § 325. 3 (a);
104. see also 12 C. F. R. pt. 208, app. A (Federal Reserve) (noting that "the final supervisory judgment on a bank's capital adequacy may differ significantly from conclusions that might be drawn solely from the level of its risk-based capital ratio");
105. C. F. R. § 3. 11 (OCC) ("The appropriate minimum capital ratios for an individual bank cannot be determined solely through the application of a rigid mathematical formula or wholly objective criteria. The decision is necessarily based in part on subjective judgment grounded in agency expertise.");
106. C. F. R. § 567.3 (OTS) ("Minimum capital levels higher than the risk-based capital requirement, the leverage ratio requirement or the tangible capital requirement required under this part may be appropriate for individual savings associations.").
107. 12 C. F. R. § 325. 3 (a).
108. 12 C. F. R. pt. 208, app. A. Higher capital requirements might also be appropriate when the bank has significant interest rate risk, liquidity issues, poor earnings, portfolio risk, or risk from nontraditional activities.
109. 12 C. F. R. § 3. 11.
110. See FDIC, DIVISION OF SUPERVISION AND CONSUMER PROTECTION, RISK MANAGEMENT MANUAL OF EXAMINATION POLICIES §§ 13. 1, 14.1, 15.1 (2004) [hereinafter FDIC, RISK MANAGEMENT MANUAL], available at http://www.fdic.gov/ regulations/safety/manual/manual-examinations-full.pdf;
111. Federal Reserve, COMMERCIAL BANK EXAMINATION MANUAL § 5040. 1 (2011), available at http://www.federalreserve.gov/board docs/supmanual/cbem/ cbem.pdf;
112. OCC, AN EXAMINER'S GUIDE TO PROBLEM BANK IDENTIFICATION, REHABILITATION, AND RESOLUTION 28, 92-108 (2001) [hereinafter OCC, EXAMINER'S GUIDE], available at http://www.occ.gov/publications/publications-by-type/other-publications- reports/prbbnk gd.pdf;
113. OCC, POLICIES & PROCEDURES MANUAL 5310-3 (2011) [hereinafter OCC, PPM 5310-3], available at http://www.occ.gov/static/publications/ppm-5310-3.pdf;
114. OTS, EXAMINATION HANDBOOK § 080 (2011), available at http://www.ots.treas.gov/files/422345.pdf.
115. 12 U. S. C. § 1818 (a) (2), (e), (i) (2) (2006).
116. 12 U. S. C. § 1831 o (a) (2).
117. 12 U. S. C. § 1831 o (b) (2) (G).
118. In urgent circumstances, the regulator can issue an immediately effective prompt corrective action directive. 12 C. F. R. §§ 325. 105 (b), 308.201 (2009) (FDIC);
119. C. F. R. §§ 208. 45 (b), 263.202 (a) (2) (Federal Reserve);
120. C. F. R. § 6. 21 (OCC);
121. C. F. R. § 565. 7 (OTS).
122. 12 U. S. C. § 1818 (i);
123. C. F. R. § 308. 204 (a) (FDIC);
124. C. F. R. § 263. 205 (a) (Federal Reserve);
125. C. F. R. § 6. 25 (a) (OCC);
126. C. F. R. § 565. 10 (a) (OTS).
127. See generally 12 U. S. C. § 1831 o.
128. See OCC, PPM 5310-3, supra note 79, at 5 (noting that a prompt corrective action directive "can enhance the office's use of resolution options later because failure to submit or implement a capital restoration plan required in [the] directive is a ground for receivership").
129. 12 U. S. C. § 3907 (b) (2) (A).
130. 12 C. F. R. § 325. 6 (FDIC);
131. C. F. R. § 263. 83 (Federal Reserve);
132. C. F. R. §§ 3. 15-21 (OCC);
133. C. F. R. § 567. 4 (OTS).
134. See FDIC v. Bank of Coushatta, 930 F.2d 1122, 1126 (5th Cir. 1991).
135. see also John C. Deal, Banking Law is Not for Sissies: Judicial Review of Capital Directives, 12 J. L. & COM. 185 (1993);
136. Keith R. Fisher, Michael Roster, Karen Shaw Petrou, Wayne A. Abernathy & Charles Taylor, Panel Discussion: "The Ideal Basel", 13 FORDHAM J. CORP. & FIN. L. 139, 175 (2008).
137. 12 U. S. C. §§ 1818 (i) (1), 3907 (b) (2) (B) (ii).
138. FDIC, RISK MANAGEMENT MANUAL, supra note 79, at § 15. 1-11;
139. see also OCC, PPM 5310-3, supra note 79, at 21.
140. FDIC, RISK MANAGEMENT MANUAL, supra note 79, at § 15. 1-11.
141. See OTS, supra note 79, at §§ 80. 8.
142. OCC, PPM 5310-3, supra note 79, at 21;
143. LISSA L. BROOME & JERRY W. MARKHAM, REGULATION OF BANK FINANCIAL SERVICE ACTIVITIES 581 (4th ed. 2011).
144. See Joseph T. Lynyak III, The Failing Bank Scenario-An Explanation and Suggested Analysis for a Bank's Board of Directors and Management, 126 BANKING L. J. 771, 774 n. 7 (2009).
145. 12 U. S. C. § 1818 (b) (1) (2006).
146. FDIC, ACTIONS PROCEDURES MANUAL, supra note 79, at § 4-4.
147. 12 U. S. C. § 1818 (b) (1).
148. See James M. Rockett, Confronting a Regulatory Crisis: A View from the Trenches During Troubled Times, 126 BANKING L. J. 307, 312 (2009);
149. see also FDIC, ACTIONS PROCEDURES MANUAL, supra note 79, at § 5-5 ("To eliminate the need for time-consuming administrative hearings, the FDIC attempts to obtain the respondent's stipulation to a consent Order.").
150. OCC, PPM 5310-3, supra note 79, at 18-19;
151. 12 U. S. C. § 1818 (i).
152. FDIC, RISK MANAGEMENT MANUAL, supra note 79, at § 15. 1-4;
153. see also FDIC, ACTIONS PROCEDURES MANUAL, supra note 79, at § 5-8 ("If the amount [of capital] requested is larger than the [regulatory] minimum capital requirements, the amount must be justified based on the institution's condition. ").
154. See FDIC, RISK MANAGEMENT MANUAL, supra note 79, at §§ 15. 1-1 to 15.1-14;
155. FEDERAL RESERVE, supra note 79, § 5040.1, at 1-2;
156. OCC, PPM 5310-3, supra note 79, at 18-21;
157. OTS, supra note 79, at §§ 080.1-.9.
158. See 12 U. S. C. §§ 1818 (b) (1), 1818 (e) (l) (A) (i) (IV), 1818 (i) (2) (A) (iv), 1818 (u) (1) (A);
159. see also 12 C. F. R. § 325. 2 (z) (FDIC).
160. OTS, supra note 79, at §§ 080. 7-.8;
161. see also FEDERAL RESERVE, supra note 79, § 5040.1, at 3 ("The provisions of a written agreement may relate to any of the problems found at the bank").
162. See 12 U. S. C. §§ 1818 (b) (1), 1818 (e) (1) (A) (i) (IV), 1818 (i) (2), 1818 (u) (l) (A);
163. see also 12 C. F. R. § 325. 2 (z) (FDIC).
164. See 12 U. S. C. §§ 1818 (b), (i).
165. FDIC, RISK MANAGEMENT MANUAL, supra note 79, at § 15. 1-11;
166. OCC, PPM 5310-3, supra note 79, at 19-20 ("Often the semantic title difference is significant to many boards of directors, who will agree to enter into a Formal Agreement where they would otherwise fight a Consent Order. However, in some cases, the OCC's long-term strategy for the bank may require the use of a [Consent Order] rather than a Formal Agreement.").
167. see also Jerry L. Mashaw, Reinventing Government and Regulatory Reform: Studies in the Neglect and Abuse of Administrative Law, 57 U. PITT. L. REV. 405, 420-21 (1996) (noting that "banking regulatory agencies can probably be equally effective through threats of prosecution, even raised eyebrows", as they can through formal regulation).
168. FDIC, RISK MANAGEMENT MANUAL, supra note 79, at § 15. 1-1;
169. FEDERAL RESERVE, supra note 79, § 5040. 1, at 6;
170. OCC, PPM 5310-3, supra note 79, at 4;
171. OTS, supra note 79, at § 080. 5.
172. FDIC, RISK MANAGEMENT MANUAL, supra note 79, at § 15. 1-1.
173. FDIC, ACTIONS PROCEDURES MANUAL, supra note 79, at § 3-2.
174. FEDERAL RESERVE, supra note 79, § 5040. 1, at 6;
175. OCC, PPM 5310-3, supra note 79, at 18;
176. OTS, supra note 79, at § 080. 6;
177. See Federal and State Enforcement of Financial Consumer and Investor Protection Laws: Hearing Before the H. Comm. on Fin. Servs., 111th Cong. 65-66 (2009) (written testimony of John C. Dugan, Comptroller of the Currency);
178. OCC, ANN. REP. 41 (2009);
179. OCC, ANN. REP. 35 (2008).
180. FDIC, RISK MANAGEMENT MANUAL, supra note 79, at § 13. 1-1;
181. FEDERAL RESERVE, supra note 79, § 5040. 1, at 6;
182. OCC, PPM 5310-3, supra note 79, at 18;
183. OTS, supra note 79, at § 080. 5.
184. FDIC, ACTIONS PROCEDURES MANUAL, supra note 79, at § 1-4.
185. See FDIC, ANN. REP. 26 (2009);
186. Federal Reserve, 96 ANN. REP. 109 (2009);
187. OCC, ANN. REP. 40 (2010).
188. FDIC, RISK MANAGEMENT MANUAL, supra note 79, at § 13. 1-1 (stating that informal action "is a means of seeking informal corrective administrative action from [banks] considered to be of supervisory concern, but which have not deteriorated to the point where they warrant formal administrative action");
189. OCC, PPM 5310-3, supra note 79, at 4 ("When a bank's overall condition is sound, but it is necessary to obtain written commitments from a bank's board of directors to ensure that identified problems and weaknesses will be corrected, the OCC may use informal enforcement actions." (emphasis in original));
190. OTS, supra note 79, at § 080. 5 ("When [a bank's] overall condition is sound, but it is necessary to obtain written commitments from [a bank's] board of directors or management to ensure that it will correct the identified problems and weaknesses, OTS may use informal enforcement actions.").
191. Joe Peek & Eric S. Rosengren, Bank Regulatory Agreements in New England, NEW ENG. ECON. REV., May/June 1995, at 15.
192. Philip A. Wellons, Enforcement of Risk-Based Capital Rules, in CAPITAL ADEQUACY BEYOND BASEL: BANKING, SECURITIES, AND INSURANCE 284 (Hal S. Scott ed., 2005).
193. See Federal Deposit Insurance Corporation Improvement Act of 1991, Pub. L No. 102-242, § 305 (b) Stat. 2236, 2354-55 (1991);
194. Prompt Corrective Action, 57 Fed. Reg. 44, 866 (Sept. 29, 1992)
195. (codified at 12 C. F. R. pts. 6, 19, 208, 263, 308, 325, 565).
196. Michael S. Heifer & Mary Jane Wilson-Bilik, FDICIA's Prompt Corrective Action Provisions Limit Discretion of Regulators, 11 BANKING POL'Y REP., no. 7, 1992 at 5.
197. See Capital Maintenance, 154 Fed. Reg. 11, 500 (Mar. 21, 1989)
198. (codified at 12 C. F. R. pt. 325) (FD1C);
199. Risk-Based Capital Guidelines, 54 Fed. Reg. 4168 (Jan. 27, 1989)
200. (codified at 12 C. F. R. pt. 3) (OCC);
201. Capital 54 Fed. Reg. 4186 (Jan. 27, 1989)
202. (codified at 12 C. F. R. pts. 208, 225) (Federal Reserve);
203. Prompt Corrective Action, 57 Fed. Reg. 44, 866 (Sept. 29, 1992)
204. (codified at 12 C. F. R. pts. 6, 19, 208, 263, 308, 325, 565). However, banks were allowed to meet lower numerical capital requirements until December 31, 1992.
205. See, e.g., Risk-Based Capital Guidelines, 54 Fed. Reg. 4168 (Jan. 27, 1989)
206. (codified at 12 C. F. R. pt. 3). Since 1992, there have been amendments to the capital regulations, but the bulk of the rules remain unchanged.
207. See, e.g., Risk Based Capital Requirement, 62 Fed. Reg. 55, 490 (Oct. 24. 1997) (adjusting the capital treatment of transfers of small business loans).
208. Another commentator during the 1990s suggested that regulators rarely used their discretion to set individual bank capital requirements. Stuart D. Root, Three Cs of Bank Capital: Convergence, Conundrums and Contrariness, 1994 COLUM. BUS. L. REV. 135, 151 (stating that "in each instance where there existed statutory authorization for regulators to make judgments based on the 'particular circumstances' of institutions, regulators eschewed that authority").
209. See US Business Cycle Expansions and Contractions, NAT'L BUREAU OF ECON. RES. (Sept. 20, 2010), http://www.nber.org/cycles/cyclesmain. html.
210. See FDIC Enforcement Decisions and Orders, FDIC, http://www.fdic.gov/ bank/individual/enforcement/begsrch.html (last visited Aug. 19, 2011);
211. Search Enforcement Actions, FEDERAL RESERVE http://www.federalreserve. gov/boarddocs/enforcement/search.cfm (last visited Aug. 19, 2011);
212. Enforcement Actions Search Tool, OCC, http://apps.occ.gov/ EnforcementActions/ (last visited Aug. 19, 2011);
213. Enforcement Search, OTS http://www.ots.treas.gov/?p=EnforcementSearch (last visited Aug. 19, 2011).
214. See R. ALTON GILBERT, NETWORKS FIN. INST., KEEP THE LEVERAGE RATIO FOR LARGE BANKS TO LIMIT THE COMPETITIVE EFFECTS OF IMPLEMENTING BASEL II CAPITAL REQUIREMENTS 7 (2006), available at http://www.networksfinancialinstitute.org/ Lists/Publi cation%20Library/Attachments/10/2007-PB-08-VanHoose.pdf. Nevertheless, this study uses adequately capitalized as the minimum standard because doing so allows examination of individual bank minimum capital requirements that are set between the adequately capitalized and well capitalized levels. Using well capitalized as the minimum standard would have excluded these data, resulting in a less complete view of capital enforcement activity.
215. Regulators Issuing Orders on Record Pace; Enforcement Actions Becoming 'Ordinary', BANK SAFETY & SOUNDNESS ADVISOR, Sept. 6, 2010, at 4 [hereinafter Regulators Issuing Orders on Record Pace] (quoting Matthew Anderson, managing director of Foresight Analytics);
216. see also Cheyenne Hopkins, Agencies' Orders to Banks Set Mark in '10, AM. BANKER, Feb. 11, 2011, at 1;
217. Cheyenne Hopkins, Regulatory Actions Hit a Record Level in '09, AM. BANKER, Mar. 10, 2010, at 1;
218. Russ Wiles, Words of Warning: Regulators More Aggressive About Enforcement Orders for Banks, ARIZ. REPUBLIC, June 6, 2010, at D1;
219. Rachel Witkowski, More Banks Feel Sting of Actions by Agencies, AM. BANKER, Aug. 13, 2010, at 1.
220. See Regulators Issuing Orders on Record Pace, supra note 183, at 3 (quoting bank attorney Jeffrey Gerrish).
221. see also Hopkins, Regulatory Actions Hit a Record Level in '09, supra note 183, at 1 (quoting Professor Cornelius Hurley as stating, "I would think the main driver for [enforcement actions] is capital deficiencies");
222. See Statistics on Depository Institutions, FDIC, http://www2.fdic.gov/ sdi/ (last updated Aug. 16, 2011). Thus, the increase in the number of enforcement orders is not due to an increase in the number of regulated banks.
223. See Elizabeth Warren, Making Credit Safer: The Case for Regulation, HARV. MAC, May-June 2008, at 34, 35.
224. See Serena Ng & Ruth Simon, Ratings Cuts by S&P, Moody's Rattle Investors, WALL ST. J., July 11, 2007, at A1.
225. See generally RICHARD A. POSNER, A FAILURE OF CAPITALISM: THE CRISIS OF '08 AND THE DESCENT INTO DEPRESSION (2009);
226. Douglas W. Arner, The Global Credit Crisis of 2008: Causes and Consequences, 43 INT'L LAW. 91 (2009).
227. See Landon Thomas, Jr., Run on Big Wall St. Bank Spurs U. S.-Backed Rescue, N. Y. Times, Mar. 15, 2008, at A1.
228. See Edmund L. Andrews, In Sweeping Move, Fed Backs Buyout and Wall St. Loans, N. Y. TIMES, Mar. 17, 2008, at A1;
229. Landon Thomas, Jr. & Eric Dash, Seeking Fast Deal, JP Morgan Quintuples Bear Stearns Bid, N. Y. TIMES, Mar. 25, 2008, at C11.
230. DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT: LAW, EXPLANATION AND ANALYSIS 32 (2010) (citation omitted).
231. See, e.g., THE FIN. CRISIS INQUIRY COMM'N, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES 353-401 (2011) (describing the 2008 financial crisis and its lingering aftershocks);
232. Joe Adler, Loan Quality Improves as Fee Income, Revenue Dip, AM. BANKER, Feb. 24, 2011, at 1 (noting that FDIC Chairman Sheila Bair called 2010 "a turnaround year").
233. See Barbara A. Rehm, FDIC Cuts'94 Budget 5% as Workload Plunges, AM. BANKER, Dec. 15, 1993, at 3;
234. Barbara A. Rehm, "Prompt Action" Specter Fades; Upturn Made Plans for Early Intervention Irrelevant, AM. BANKER, Aug. 9, 1993, at 17 (stating that "record-breaking [bank] earnings [and] low interest rates" explained why the number of enforcement actions in 1993 was lower than in previous years).
235. See Barbara A. Rehm, Prompt Corrective Action Used in Just 30% of Capital-Poor Banks, AM. BANKER, Jan. 12, 1995, at 3.
236. There were 736 written agreements, 583 consent orders, and 804 cease-and-desist orders issued by consent. In addition, 2 actions issued by the OCC were labeled as "Safety and Soundness Orders."
237. See Robert Barba, FDIC Speaks More Softly, Retains Stick, AM. BANKER, Nov. 16, 2009, at 1.
238. See OFFICE OF INSPECTOR GEN., DEP'T OF THE TREASURY, AUDIT REPORT: MANAGEMENT LETTER FOR THE AUDIT OF THE OFFICE OF THE COMPTROLLER OF THE CURRENCY'S FISCAL YEARS 2010 AND 2009 FINANCIAL STATEMENTS (2010).
239. OCC, ANN. REP. 21 (2007);
240. OCC, ANN. REP. 15 (2006);
241. OCC, ANN. REP. 21 (2005);
242. OCC, ANN. REP. 15 (2004);
243. OCC, ANN. REP. 16 (2003). Annual reports prior to 2003 do not contain summary data about enforcement actions.
244. OCC, ANN. REP. 35 (2008).
245. OCC, ANN. REP. 41 (2009);
246. see also Examiner Hot Buttons: Reserves, Capital, Management Oversight, BANK SAFETY & SOUNDNESS ADVISOR, Apr. 5, 2010, at 1 (discussing the OCC's increasing use of individual minimum capital ratio letters);
247. T. J. Grasmick, Today's Bank Regulatory Enforcement Landscape: Tough Disclosure Issues and Unintended Consequences, BANKNEWS, Sept. 2009, at 14, 15 (same).
248. These data are consistent with press reports that generally indicate a rise in informal enforcement actions between 2008 and 2009.
249. See Hopkins, Regulatory Actions Hit a Record Level in '09, supra note 183, at 1 (reporting 1099 informal actions in 2009).
250. The Wall Street Journal similarly reported that the Federal Reserve and FDIC had issued more informal MOUs by August of 2009 than they had in all of 2008.
251. See Damian Paletta & David Enrich, Regulators Step Up Bank Actions, WALL ST. J., Aug. 26, 2008, at C1. The article states that the FDIC had entered into 118 MOUs through August 15, 2008, compared with 175 in 2007. Neither article reported informal actions by the OTS. According to the Wall Street Journal, the OTS would not provide data on MOUs, but did acknowledge "a significant spike."
252. OCC, ANN. REP. 40 (2010). Data for the FDIC and Federal Reserve show that their informal enforcement actions (of all types, including capital) rose in 2010.
253. See Hopkins, Agencies' Orders to Banks Set Mark in '10, supra note 183, at 1 (noting that in 2010, the FDIC issued 890 informal actions and the Federal Reserve issued 639). In fact, the FDIC's total number of informal actions rose so dramatically between 2009 and 2010 that Gil Schwartz, a partner in Schwartz & Ballen LLP, concluded that "[t]he FDIC seems to have taken the approach of de-emphasizing its reliance on formal orders and increasing its reliance on informal memorandums of understanding."
254. See R. Alton Gilbert & Mark D. Vaughan, Do Depositors Care About Enforcement Actions?, 53 J. ECON. & BUS. 283, 287 (2001).
255. See Is 12 the New 10? Examiners Ask for More and More Capital, Orders Show, BANK SAFETY & SOUNDNESS ADVISOR, July 19, 2010, at 1 [hereinafter Is 12 the New 10?] (reporting that Tom Youngblood, president of Park Cities Bank in Dallas, "expressed disbelief that examiners are demanding so much capital beyond the well-capitalized definitions").
256. What New Capital Ratios Would Mean for Banks, BANK SAFETY & SOUNDNESS ADVISOR, July 26, 2010, at 1.
257. See Steve Cocheo, Squeeze Play, A. B. A. BANKING J., Nov. 2010, at 26, 27 (stating that "bankers talk about [12%] as the new de facto [total risk-based capital] requirement");
258. Is 12 the New 10?, supra note 214, at 1 ("[Bank] examiners are seeking 9% to 10% Tier 1 leverage capital ratios⋯");
259. Damian Paletta & David Enrich, Banks Told: Lend More, Save More, WALL ST. J., Dec. 26, 2008, at C1 ('"At the moment, for many banks, eight[% tier 1 risk-based capital] is the new six and 12[% total risk-based capital] is the new 10', said Eugene A. Ludwig, former head of the Office of the Comptroller of the Currency, which oversees many U. S. banks.");
260. Exploring the Balance Between Increased Credit Availability and Prudent Lending Standards: Hearing Before the H. Comm. on Fin. Servs., 111th Cong. 167 (2009) (written testimony of Scott M. Polakoff, Acting Director, Office of Thrift Supervision).
261. See 12 U. S. C. §§ 1831 n (c), 4803 (2006);
262. U. S. C. S § 5371 (Lexis Nexis 2010) (contemplating uniform bank capital standards).
263. S. REP. No. 111-176, at 87 (2010) ("It is the view of the Committee that, as a matter of good public policy, banks⋯ should not compete on the basis of differences in safety and soundness regulation. ").
264. Joseph Jude Norton, Capital Adequacy Standards: A Legitimate Regulatory Concern for Prudential Supervision of Banking Activities?, 49 OHIO ST. L. J. 1299, 1355 (1989);
265. see also Heath Price Tarbert, Rethinking Capital Adequacy: The Basle Accord and the New Framework, 56 Bus. Law. 767, 778 (2001);
266. Charles K. Whitehead, What's Your Sign?-International Norms, Signals, and Compliance, 27 MICH. J. INT'L L. 695, 727 n. 168 (2006).
267. See Richard Falk & Andrew Strauss, On the Creation of a Global Peoples Assembly: Legitimacy and the Power of Popular Sovereignty, 36 STAN. J. INT'L L. 191, 212 n. 88 (2000) ("Minimally capitalized banks have a competitive advantage in loaning money but also have a heightened risk of failure.").
268. See Paul Davis, Heather Landy, Katie Kuehner-Hebert et al., Best in Banking, Year in Review, AM. BANKER, Dec. 7, 2009, at 19A.
269. See Robin Sidel, David Enrich & Dan Fitzpatrick, WaMu Is Seized, Sold Off to J. P. Morgan, In Largest Failure in U. S. Banking History, WALL ST. J., Sept. 26, 2008, at A1 (discussing regulators' closure of Washington Mutual).
270. Drew Desilver, Infighting Distracted WaMu's Regulators-Turf Battles One Agency Thwarted Another's Access to Data-Or a Desk, SEATTLE TIMES, Apr. 17, 2010, at A1.
271. Joe Adler, FDIC's 'Big One': Long Prelude Gave Way to a Sudden End, AM. BANKER, Sept. 29, 2008, at 1.
272. Joe Adler, 'Pitiful' OTS Blamed for Wamu's Fall, AM. BANKER, Apr. 19, 2010, at 1 (reporting that the former OTS chairman stated that Washington Mutual's failure "was a liquidity failure, not a capital failure");
273. Drew Desilver, WaMu Hearings Depict Sinking Bank, SEATTLE TIMES, Apr. 25, 2010, at C1 (stating that the FDIC believed Washington MutuaPs "mortgage losses were mounting, (credit) downgrades were occurring, and efforts to raise capital had been exhausted").
274. Mary Kane, Agency at Forefront of Mortgage Crisis Making a Comeback, THE WASH. INDEP. (Jan. 9, 2009, 4: 59 PM), http://washingtonindependent.com/24782/ insurancefirrns-aim-for-tarp-rnoney-less-oversight;
275. see also Kenneth W. Dam, The Subprime Crisis and Financial Regulation: International and Comparative Perspectives, 10 CHI. J. INT'L L. 581, 596 (2010) ("The OTS has a reputation for being a more pliable regulator.");
276. Richard Clough, FirstFed's Fault Lines: Some Former Executives Feel Regulators Short-Circuited Efforts to Save the Santa Monica Institution, L. A. Bus. J., Mar. 29, 2010, at 22 (calling the OTS "a notoriously lenient regulator");
277. Brady Dennis, Born in a Previous Crisis, OTS Faces Extinction, WASH. POST, June 18, 2009, at A15 ("Over time, the OTS has become synonymous with ineffective and lax regulation, failing to rein in high-risk, destructive practices of some of the largest institutions it monitors.").
278. S. Rep. No. 111-176, at 26 (2010) (noting that "the thrift charter 'created opportunities for private sector arbitrage' of the regulatory system");
279. To create Figure 7, data from the formal capital enforcement study were compared with the data concerning the number of banks supervised by each regulator. The number of banks for each year was determined by searching the FDIC's Statistics on Depository Institutions.
280. See Statistics on Depository Institutions, FDIC, http://www2.fdic.gov/ sdi/ (last updated Aug. 16, 2011). The number of banks was determined as of December 31 of the preceding year.
281. Even that action softened the language by using the title "Consent Cease and Desist Order." In re Capitol Nat'I Bank, Order No. OCC-2009-216 (Dec. 22, 2009).
282. See ALAN C. ACOCK, A GENTLE INTRODUCTION TO STATA 189-90 (2d ed. 2008);
283. ROBERT M. LAWLESS, JENNIFER K. ROBBENNOLT & THOMAS S. ULEN, EMPIRICAL METHODS IN LAW 285 (2010).
284. William J. Brown, Formal Enforcement Actions Issued Against Institutions-What Do Today's Numbers Say?, SRC INSIGHTS (Fed. Reserve Bank of Phila.), Fourth Quarter 2009, at 9. However, when a Federal Reserve Bank of Philadelphia study summarized the requirements contained in the 2009 formal enforcement actions, it did not mention individual bank capital requirements.
285. See Summary of Deposits, FDIC, http://www2.fdic.gov/sod/ (linking to Summary Tables, which provides a table for the Top 50 Commercial Banks and Savings Institutions by Deposits) (June 30, 2010 report).
286. Peter S. Goodman & Gretchen Morgenson, Saying Yes to Anyone, WaMu Built Empire on Shaky Loans, N. Y. TIMES, Dec. 28, 2008, at A1;
287. Summary of Deposits, supra note 253 (June 30, 2008 report).
288. David Enrich & Dan Fitzpatrick, Wachovia Chooses Wells Fargo, Spurns Citi, WALL ST. J., Oct. 4, 2008, at A1.
289. Sudeep Reddy, Bernanke Eases Bank-Nationalization Fears, WALL ST. J., Feb. 25, 2009, at A2.
290. HENRY M. PAULSON, JR., ON THE BRINK: INSIDE THE RACE TO STOP THE COLLAPSE OF THE GLOBAL FINANCIAL SYSTEM 358-68 (2010) (describing the meetings that lead to the government's initial capital investment in these banks). Treasury provided the capital investments through the Troubled Asset Relief Program created by Congress.
291. See Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, 122 Stat. 3765.
292. BD. OF GOVERNORS OF THE FED. RESERVE SYS., THE SUPERVISORY CAPITAL ASSESSMENT PROGRAM: DESIGN AND IMPLEMENTATION (2009);
293. David Wessel, Capital: What Testing Banks Will Tell Us About Their Health, WALL ST. J., May 7, 2009, at A2.
294. BD. OF GOVERNORS OF THE FED. RESERVE SYS., THE SUPERVISORY CAPITAL ASSESSMENT PROGRAM: OVERVIEW OF RESULTS 9 (2009);
295. Damian Paletta & Deborah Solomon, More Banks Will Need Capital WALL ST. J., May 5, 2009, at A1;
296. Deborah Solomon, David Enrich & Damian Paletta, Banks Need at Least $65 Billion in Capital, WALL ST. J., May 7, 2009, at A1.
297. See generally NEIL M. BAROFSKY, SPECIAL INSPECTOR GENERAL FOR THE TROUBLED ASSET RELIEF PROGRAM, EXTRAORDINARY FINANCIAL ASSISTANCE PROVIDED TO CITIGROUP, INC.. (2011) (describing Citigroup's financial condition and the government's effort to prevent its failure).
298. Summary of Deposits, supra note 253. The list for 1993, the first year for which formal capital enforcement action data were collected, was not available. Because there is a significant overlap on the Top 50 lists from year to year, it is likely that little is lost by the unavailability of the 1993 list.
299. Summary of Deposits, supra note 253 (June 30, 2001 report).
300. Summary of Deposits, supra note 253 (June 30, 2009 report). In 2008, Colonial Bank was the forty-ninth-largest bank. Id. (June 30, 2008 report).
301. Although the largest banks did not receive formal capital enforcement actions, they did receive formal actions for reasons other than capital.
302. See generally Geoffrey P. Miller, Legal Restrictions on Bank Consolidation: An Economic Analysis, 11 IOWA L. REV. 1083 (1992) (arguing that geographic diversification of assets at large banks promotes safety and soundness).
303. Quarterly Banking Profile Time Series Spreadsheet: Ratios by Asset Size Group, FDIC, http://www2.fdic.gov/qbp/timeseries/RatiosByAssetSizeGroup.xls (last visited Aug. 19, 2011).
304. Binyamin Appelbaum, Big Banks to Pay Larger Share of FDIC Levy-Fees to Replenish Fund Altered After Protest by Small Institutions, WASH. POST, May 23, 2009, at A13.
305. See generally Joseph J. Norton, A Perceived Trend in Modern International Financial Regulation: Increasing Reliance on a Public-Private Partnership, 37 INT'L LAW. 43, 50-51 (2003) ("The safety and soundness of elite banks is enormously important to the banking authorities⋯ perhaps to the detriment of other banking institutions and economic interests. The reality is that more influential elite banks, in all likelihood, exert greater influence upon banking authorities than the authorities exert upon them.").
306. According to the Wall Street Journal, Bank of America and Citibank did receive informal enforcement actions related to the financial condition of the banks from their regulators during the financial crisis.
307. See Dan Fitzpatrick, U. S. Regulators to BofA: Obey or Else, WALL ST. J., July 16, 2009, at C1.
308. Dan Fitzpatrick, Fed Poised to Ease Its Grip on Banks, WALL ST. J., Mar. 18, 2011, at C1. This type of restriction is commonly seen in formal capital enforcement actions.
309. 32 CHARLES ALAN WRIGHT & CHARLES H. KOCH, JR., FEDERAL PRACTICE & PROCEDURE: JUDICIAL REVIEW OF ADMINISTRATIVE ACTION § 8123 (2006) ("The choice between the individual decisionmaking of adjudication and the generalized, policy oriented decision of rulemaking is generally left to the agency." (footnote omitted)).
310. See generally JERRY L. MASHAW & DAVID L. HARFST, THE STRUGGLE FOR AUTO SAFETY (1990);
311. Jerry L. Mashaw & David L. Harfst, Regulation and Legal Culture: The Case of Motor Vehicle Safety, 4 YALE J. ON REG. 257 (1987).
312. Robert G. Bone, Who Decides? A Critical Look at Procedural Discretion, 28 CARDOZO L. REV. 1961, 1962 (2007).
313. Andrew P. Morriss, Bruce Yandle & Andrew Dorchak, Choosing How to Regulate, 29 HARV. ENVTL. L. REV. 179 (2005).
314. See ROBERTA S. KARMEL, REGULATION BY PROSECUTION: THE SECURITIES AND EXCHANGE COMMISSION VS. CORPORATE AMERICA (1982);
315. Jonathan R. Macey, Wall Street in Turmoil: State-Federal Relations Post-Eliot Spitzer, 70 BROOK. L. REV. 117, 128-30 (2004);
316. James J. Park, The Competing Paradigms of Securities Regulation, 57 DUKE L. J. 625 (2007);
317. Harvey L. Pitt & Karen L. Shapiro, Securities Regulation by Enforcement: A Look Ahead at the Next Decade, 7 YALE J. ON REG. 149, 149 (1990).
318. See generally David Jones, Emerging Problems with the Basel Capital Accord: Regulatory Capital Arbitrage and Related Issues, 24 J. BANKING & FIN. 35 (2000).
319. See DANIEL K. TARULLO, BANKING ON BASEL: THE FUTURE OF INTERNATIONAL FINANCIAL REGULATION 80-82 (2008) (cataloguing various types of regulatory arbitrage possible under Basel I, but concluding that "there is very little empirical work that quantifies the practice");
320. Patricia A. McCoy, Musings on the Seeming Inevitability of Global Convergence in Banking Law, 7 CONN. INS. L. J. 433, 450-56 (2001).
321. Duncan E. Alford, Basle Committee International Capital Adequacy Standards: Analysis and Implications for the Banking Industry, 110 DICK. J. INT'L L. 189, 217 (1992).
322. Letter from Timothy F. Geithner, Secretary of the Treasury, to Keith Ellison, U. S. House of Representatives (Jan. 11, 2010), available at http://ellison. house.gov/images/stories/Documents/2010/01-11-10-Treasury- Letter.pdf. Secretary Geithner supports including numerical requirements in regulatory, as opposed to statutory, text.
323. Arturo Estrella, Formulas or Supervision? Remarks on the Future of Regulatory Capital, FRBNYECON. Pol'yRev., Oct. 1998, at 191, 195.
324. S. Raihan Zamil, Judgment Day, FIN. & DEV., Sept. 2010, at 44, 46 (emphasis omitted).
325. Hopkins, Regulatory Actions Hit a Record Level in '09, supra note 183, at 1 (quoting Kevin Murkri, OCC spokesman).
326. See generally Douglas W. Arner, The Global Credit Crisis of 2008: Causes and Consequences, 43 INT'L LAW. 91 (2009). All of these items would negatively impact a bank's balance sheet.
327. See, e.g., The Condition of Financial Institutions: Examining the Failure and Seizure of an American Bank: Hearing Before the Subcomm. on Fin. Insts. & Consumer Credit of the H. Comm. on Fin. Servs., 111th Cong. 101 (2010) (written testimony of Jennifer Kelly, Senior Deputy Comptroller for Midsize and Community Bank Supervision, OCC) ("Regulators expect banks with significant credit concentrations or deteriorating asset quality to hold higher capital levels to compensate for their risk profile.").
328. See Eric Bruskin, Anthony B. Sanders & David Sykes, The Nonagency Mortgage Market: Background and Overview, in THE HANDBOOK OF NONAGENCY MORTGAGE-BACKED SECURITIES 5, 9-10 (Frank J. Fabozzi, Chuck Ramsey & Michael Marz eds., 2d ed. 2000);
329. Frank Partnoy & David A. Skeel, Jr., The Promise and Perils of Credit Derivatives, 75 U. CIN. L. REV. 1019, 1019-23 (2007);
330. Christopher L. Peterson, Fannie Mae, Freddie Mac, and the Home Mortgage Foreclosure Crisis, 10 LOY. J. PUB. INT. L. 149, 158-59 (2009);
331. Ben S. Bemanke, Chairman, Bd. of Governors of the Fed. Reserve Sys., Speech at the Federal Reserve System's Sixth Biennial Community Affairs Research Conference: Financial Innovation and Consumer Protection (Apr. 17, 2009), available at http://www.federalreserve.gov/newsevents/speech/bemanke20090417a. htm.
332. see also Ezra Klein, Don't Trust the Regulators; Financial Reform Can't Be Left to Those Who Failed Us Before, NEWSWEEK, Apr. 12, 2010, at 20 ('"The story the regulators want to tell', says Richard Carnell, a former assistant secretary of the Treasury for financial markets, '[is] that they just needed more tools. But they can set capital requirements now. They had ample tools, and they lacked the prescience and will to use them.'" (alteration in original)).
333. See Hopkins, Regulatory Actions Hit a Record Level in '09, supra note 183, at 1 (quoting economist Chris Low as stating that "[t]he regulators were asleep for 10 years during the [economic] boom");
334. See, e.g., John C. Coffee, Jr., Systemic Risk After Dodd-Frank: Contingent Capital and the Need for Regulatory Strategies Beyond Oversight, 111 COLUM. L. REV. 795, 815-22 (2011);
335. Erik F. Gerding, The Next Epidemic: Bubbles and the Growth and Decay of Securities Regulation, 38 CONN. L. REV. 393, 423-24 (2006);
336. Larry E. Ribstein, Bubble Laws, 40 HOUS. L. REV. 77 (2003);
337. David Zaring, A Lack of Resolution, 60 EMORY L. J. 97, 117-20 (2010).
338. Joe Adler, In Reports on Failures, Regulators Also Fail: IGs Find Examiners Uncover Problems, But Don't Fix Them, AM. BANKER, Apr. 15, 2009, at 1.
339. Hopkins, Regulatory Actions Hit a Record Level in '09, supra note 183, at 1 ('"There is a consistent comment for regulators that the pendulum has swung too far', said Diane Casey-Landry, senior executive vice president and chief operating officer of the American Bankers Association. 'No one is asking for easy supervision, but we need a balance. The pendulum has swung too far, and it's inhibiting not only banks' ability to lend, but to manage their business.'").
340. See H. LAURENCE ROSS, SETTLED OUT OF COURT: THE SOCIAL PROCESS OF INSURANCE CLAIMS ADJUSTMENTS 96-101 (1970).
341. See, e.g., Stephen M. Bainbridge & G. Mitu Gulati, How Do Judges Maximize? (The Same Way Everybody Else Does-Boundedly): Rules of Thumb in Securities Fraud Opinions, 51 EMORY L. J. 83 (2002);
342. Stephen J. Choi & A. C. Pritchard, Behavioral Economics and the SEC, 56 STAN. L. REV. 1, 24-27 (2003);
343. Hillary A. Sale, Judging Heuristics, 35 U. C. DAVIS L. REV. 903 (2002).
344. Cf. Mark Seidenfeld, Why Agencies Act: A Reassessment of the Ossification Critique of Judicial Review, 70 OHIO ST. L. J. 251, 260 n. 22 (2009) ("In any case, regulators sometimes are not aware and have not evaluated the rules of thumb they use to optimize them for the decisions they face, and psychologists have demonstrated that individuals often use biased (i.e., non-optimal) rules of thumb.").
345. See 12 U. S. C. § 18310 (b) (2) (G) (2006).
346. The Dodd-Frank Act requires the "Federal banking agencies [to] establish minimum leverage capital requirements on a consolidated basis for insured depository institutions." 12 U. S. C. S. § 5371 (b) (1) (LexisNexis 2010);
347. see also 156 CONG. REC. S5891 (daily ed. July 15, 2010) (statement of Sen. Judd Gregg) ("It isn't constructive for the Congress to set arbitrary capital rules. That should be left to the regulators.").
348. 12 U. S. C. S. § 5371 (b) (1).
349. Joint Report: Differences in Accounting and Capital Standards Among the Federal Banking Agencies, 75 Fed. Reg. 47, 900, 47, 901 (Aug. 9, 2010) (emphasis added).
350. See Edward Brunet, Blending State and Federal Administrative Law, 75 CORNELL L. REV. 366, 366 (1990) (book review) (noting that "adjudication is a comparatively costly mode of regulation").
351. What an Enforcement Order Will Cost Your Bank, BANK SAFETY & SOUNDNESS ADVISOR, Nov. 22, 2010, at 1.
352. See Cheyenne Hopkins, Regulators Order an Ohio Thrift, Parent to Improve, AM. BANKER, Aug. 14, 2008, at 3 ("[I]n the current [poor economic] environment, [cease-anddesist] orders could make it more difficult for⋯ thrift[s]" to raise capital.).
353. See Steve Cocheo, Stack That Capital: Period of Turmoil Has Banks Looking for Capital Where and How They Can Find It, A. B. A. BANKING J., Sept. 2008, at 26.
354. See Damian Paletta, Raft of Deals for Failed Banks Puts U. S. on Hook for Billions, WALL ST. J., Aug. 31, 2009, at A1. These agreements often provided investors a better deal than they could have negotiated before the bank failed.
355. See Brian Olasov, Help Salvageable Banks, AM. BANKER, May 25, 2010, at 8 ("[I]nvestors prefer to negotiate over the carcass of an institution post-failure.").
356. See Lars Noah, Administrative Arm-Twisting in the Shadow of Congressional Delegations of Authority, 1997 WIS. L. REV. 873, 936 ("Undue reliance on individualized bargaining undermines consistency and invites the standardless (and largely unaccountable) exercise of agency discretion. ") (citations omitted).
357. Tom Brown, Confusion Reigns About Banks' Minimum Capital Requirements, SEEKING ALPHA (NOV. 17, 2009), http://seekingalpha.com/article/173735-confusion- reignsabout-banks-minimum-capital-requirements (emphasis omitted).
358. Chris Serres, Tough Times Prod Tougher Oversight of State Banks; Regulators Are Changing How They Define Healthy Institutions, Forcing Some Hard Adjustments, STAR TRIB. (Minneapolis), Aug. 1, 2009, at 01D ("We've read a few out-of-state (enforcement actions) that call for a 12 percent ratio⋯ We all as an industry have to play by the rules. But in the interim, it's a little confusing." (omission in original) (quoting Adam Dittrich, President and CEO, Americana Bank));
359. Why Healthy Banks Need to Raise More Capital Than Ever, BANK SAFETY & SOUNDNESS ADVISOR, July 19, 2010, at 1 ("[Tad Gage, executive vice president of Capital Insight Partners in Chicago] says the situation is frustrating for bankers. 'What is the [capital] standard? There doesn't seem to be one.'");
360. Stuart Dobson, How to Fix the So Called Banking Crisis in the U. S., COM. NOTE BROKERS (June 28, 2010), http://www.commercialnotebrokers.conVblog/how-to- fix-the-so-called-bankingcrisis-in-the-u-s/.
361. See Justin Baer & Francesco Guerrera, Regulators Tell Banks to Retain Their Funds, FIN. TIMES (London), Mar. 10, 2010, at 1 (reporting that regulators urged banks to hold capital until the banks learned whether capital requirements would be increased);
362. David Reilly, Don't Bank on Lenders Just Yet, WALL ST. J., June 28, 2010, at C10 ("Until there is greater clarity on capital, banks are unlikely to return cash to shareholders and might remain wary of lending too aggressively."). Because raising capital is costly, and can be even more costly during economic downturns, most banks would prefer to maintain capital levels rather than attempt to raise external capital when required by their regulators.
363. See David Enrich, Robin Sidel & Deborah Solomon, Fed Sees Up to $599 Billion in Bank Losses, WALL ST. J., May 8, 2009, at A1;
364. Heather Scoffield, Leaders Launch New Push in Face of Global Recession, GLOBE & MAIL (Toronto), Nov. 10, 2008, at B1 (stating that "[i]f leaders can show financial institutions that they don't plan to increase capital requirements during the downturn⋯ then banks don't have to hoard, and can start lending again").
365. See generally Franco Modigliani & Merton H. Miller, The Cost of Capital, Corporation Finance and the Theory of Investment, 48 AM. ECON. REV. 261 (1958) (establishing the Modigliani-Miller theorem);
366. Anat R. Admati, Peter M. DeMarzo, Martin F. Hellwig & Paul Pfleiderer, Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive 2 (Rock Ctr. for Corp. Governance at Stanford Univ., Working Paper No. 86, 2011), available at http://ssrn. com/abstract=1669704 (arguing that bank "equity requirements need not interfere with any of the socially valuable activities of banks, including lending");
367. Skander J. Van den Heuvel, Does Bank Capital Matter For Monetary Transmission?, 8 FRBNY ECON. POL'Y REV. 259, at 259 (2002) (noting that under the Modigliani-Miller theorem "the bank will always be able to find investors willing to finance any profitable lending opportunities, the level of bank capital is irrelevant to lending"). Many economists, however, reject the Modigliani-Miller assumption of perfect markets and conclude that higher capital requirements lead to less lending. Indeed the Peek-Rosengren Study found that banks that received formal capital enforcement actions trimmed their asset portfolios and reduced lending after receiving the action.
368. see also Joe Peek & Eric Rosengren, Bank Regulation and the Credit Crunch, 19 J. BANKING & FIN. 679 (1995);
369. Joe Peek & Eric S. Rosengren, Crunching the Recovery: Bank Capital and the Role of Bank Credit, in REAL ESTATE AND THE CREDIT CRUNCH, FED. RESESERVE BANK OF BOS. CONFERENCE SERIES No. 36, 151, at 151-71 (Lynn E. Browne & Eric S. Rosengren eds., 1992).
370. Michael R. Crittenden & Tom Barkley, Regulators to Banks: Loan to Small Firms, WALL ST. J., Feb. 6, 2010, at B4. 340.
371. See Julie Andersen Hill, Bailouts and Credit Cycles: Fannie, Freddie, and the Farm Credit System, 2010 WIS. L. REV. 1, 6-9 (discussing lending and credit cycles).
372. FDIC Mission, Vision, and Values, FDIC (May 4, 2009), http://www.fdic.gov/about/mission/index.html.
373. See Anna Gelpern, Financial Crisis Containment, 41 CONN. L. REV. 1051, 1075 (2009);
374. Richard J. Herring, The Known, the Unknown, and the Unknowable in Financial Policy: An Application to the Subprime Crisis, 26 YALE J. ON REG. 391, 401-02 (2009);
375. Saule Omarova & Adam Feibelman, Risks, Rules, and Institutions: A Process for Reforming Financial Regulation, 39 U. MEM. L. REV. 881, 883-84 (2009) ("In the wake of the current crisis, it is also now clearer that institution-level (that is, micro-prudential) regulation can be in tension with systemic stability." (footnote omitted));
376. Heidi Mandanis Schooner, Private Enforcement of Systemic Risk Regulation, 43 CREIGHTON L. REV. 993, 996 (2010) ("The 2008 Financial Crisis, however, challenged the assumption that systemic risk could be addressed by attempting to protect the solvency of individual banks (what is now called a 'micro-prudential' approach to regulation).").
377. See Joe Peek & Eric Rosengren, The Capital Crunch: Neither a Borrower Nor a Lender Be, 27 J. OF MONEY, CREDIT & BANKING 625, 625-26 (1995);
378. Is 12 the New 10?, supra note 214, at 1.
379. See generally Ben Bemanke & Mark Gertler, Agency Costs, Net Worth, and Business Fluctuations, 79 AM. ECON. REV. 14 (1989) (describing the "credit multiplier" effect).
380. See FDIC, ACTIONS PROCEDURES MANUAL, supra note 79, at 1-7 ("The FDIC's first line of supervision is the field examiner staff. The⋯ manuals of examination policy require examiners to describe any problems detected during examinations of financial institutions and to recommend appropriate corrective action. ");
381. OCC, PPM 5310-3, supra note 79, at 11 ("Generally, the [Examiner in Charge] is responsible for initially recommending the use of an enforcement action to address problems and concerns identified in assigned banks.").
382. Guidelines for Appeals of Material Supervisory Determinations, 73 Fed. Reg. 54, 822, 54, 824 (Sept. 23, 2008).
383. FDIC, ACTIONS PROCEDURES MANUAL, supra note 79, at 5-24 to 5-29, 6-12 to 6-15.
384. Modernizing Bank Supervision and Regulation-Part I: Hearing Before the S. Comm. on Banking, Hous., and Urban Affairs, 111th Cong. 64, 86 (2009) (statements of Sheila C. Bair, Chairman, FDIC and Scott M. Polakoff, Acting Dir., OTS);
385. Ben S. Bernanke, Chairman, Bd. of Governors of the Fed. Reserve Sys., Financial Regulation and Supervision After the Crisis: The Role of the Federal Reserve, Speech at the Federal Reserve Bank of Boston 54th Economic Conference (Oct. 23, 2009), available at http://www.federalreserve.gov/newsevents/speech/ bernanke20091023a.htm.
386. 12 U. S. C. § 3907 (a) (1) (2010).
387. See generally COMM. OF EUR. BANKING SUPERVISORS, POSITION PAPER ON A COUNTERCYCLICAL CAPITAL BUFFER (2009);
388. FIN. SERV. AUTH., THE TURNER REVIEW: A REGULATORY RESPONSE TO THE GLOBAL BANKING CRISIS 53-62 (2009);
389. MARKUS BRUNNERMEIER, ANDREW CROCKET, CHARLES GOODHART ET AL., THE FUNDAMENTAL PRINCIPLES OF FINANCIAL REGULATION 29-38 (2009);
390. Charles W. Calomiris, Financial Innovation, Regulation, and Reform, 29 CATO J. 65, 80-84 (2009).
391. The Condition of Financial Institutions: Examining the Failure and Seizure of an American Bank: Hearing Before the Subcomm. on Fin. Insts. & Consumer Credit of the H. Comm. on Fin. Servs., 111th Cong. 64 (2010) (written testimony of Jeff Austin HI, Chairman-Elect, Texas Bankers Ass'n).