IV Corrective Action: Common Features
- T. Asser
- Published Date:
- April 2001
1. Authority to Take Corrective Action
In defining the authority of the regulator to order corrective action, most laws use permissive language and provide that the regulator may order the bank to take corrective measures. Some provisions of banking law, however, use mandatory language in providing remedial authority, requiring the regulator to take corrective action whenever a particular infraction has occurred and is continuing or a level of noncompliance described in the law has been reached.124
Sometimes, the law reinforces the authority of the regulator. In one country, the banking law contains the following provision:
Where, notwithstanding a prior warning, an enforceable decision of the Banking Commission is not observed within the deadline specified, the Banking Commission may itself, but for the account of the noncomplying bank, take the measures that it had ordered.125
In another country, the law permits the regulator to apply for a court order requiring the bank to comply with the regulator’s instructions.126
Alternatively, the law may authorize the bank regulator to impose fines127 or other sanctions128 for not complying with prudential requirements or orders of the bank regulator. The exercise of this power by the regulator may violate international human rights if sanctions are imposed without a court of law.129 In France, the law provides that when the bank regulator imposes a sanction it is an administrative court, which as such must comply with certain procedural requirements designed to safeguard the legitimate interests of defendants, including the right to a fair and public hearing.130
The authority to order corrective measures goes hand in hand with the responsibility to impose the right corrective measures. Imposing the wrong measures may damage the bank for which they are taken, or may impair the regulator’s reputation and ultimately its credibility. Moreover, the more invasive corrective action is, the greater is the risk for the regulator that incorrect or ineffective measures will do more harm than good and create liability toward the bank concerned.
2. Grounds for Taking Corrective Action
In prescribing the grounds for corrective action, banking laws follow different patterns. Some banking law provisions follow a broad approach, prescribing generic grounds. Others follow a narrow approach and link specific authority to take certain corrective measures to one or more specified circumstances.
A good example of the broad approach is the variety of grounds specified in the banking law of Belgium, including that the bank is not operating in accordance with the provisions of the banking law and its implementing decrees and regulations, that the bank’s management policy or its financial position is likely to prevent it from honoring its commitments or fails to offer sufficient guarantees for its solvency, liquidity, or profitability, or that its management structure, administrative and accounting procedures, or internal control systems present serious deficiencies.131 In the Netherlands, the banking law authorizes corrective action if the regulator determines that the bank fails to comply with the regulator’s directions concerning the bank’s solvency, liquidity, or administrative organization or if the regulator discovers signs of a development that in its judgment endangers or could endanger the solvency or liquidity of the bank.132
A threat to the interests of a bank’s depositors is a common ground for corrective action. For instance, in England, one of the grounds for taking corrective action is that it appears to the regulator that “the interests of depositors or potential depositors of the institution are in any … way threatened, whether by the manner in which the institution is conducting or proposes to conduct its affairs or for any other reason.”133 Similarly, though more broadly, the banking law may prescribe that the bank’s ability to meet its obligations toward its creditors is endangered.134
Another example of the broad approach is the following ground for corrective action found in the banking law of Canada:
… in the opinion of the Superintendent, a bank, or a person with respect to a bank, is committing, or is about to commit, an act that is an unsafe or unsound practice in conducting the business of the bank, or is pursuing or is about to pursue any course of conduct that is an unsafe or unsound practice in conducting the business of the bank …135
Alternatively, the law may require that the bank “contravened a law or regulation relating to its business” before disciplinary sanctions are imposed.136 A somewhat extreme example of discretion is found in the statutory ground granting the bank regulator authority to take corrective action when the regulator is of the opinion that it is in the public interest to do so.137
As explained before,138 the broader the statutory grounds are for taking corrective action, the more discretion the bank regulator has in deciding that there are grounds for taking corrective action in a particular case. Therefore, broad grounds for corrective action create greater uncertainties for banks concerning the meaning and scope of the prudential standards protected by the statutory provisions concerned, and are more apt to raise doubts concerning the evenhandedness of bank regulators, than narrow grounds. To mitigate these disadvantages, the bank regulator may issue regulations giving specific content to some of the broader grounds for corrective action that are found in the banking law.
Thus, for instance, in the United States, where corrective action is authorized on the ground that a bank engages in an unsafe or unsound practice in conducting its business,139 the bank regulator has issued safety and soundness standards as well as procedures for their enforcement.140 This approach has several advantages. The banks are informed about the standards of banking practice and the procedures that the bank regulator will apply in determining whether a bank is in violation of the banking law. The standards are marginal standards defining the boundaries of tolerable banking practices; within these boundaries the banks are free; nevertheless, within the framework of its general supervision activities, the bank regulator should caution banks that are found moving close to the border line. By further defining the grounds for taking corrective action, the regulator reduces its discretion, while creating an expectation that the standards will be enforced, promoting predictability of regulatory action and enhancing its public credibility.
Some banking law provisions follow a narrower approach, for instance, by enumerating fairly precisely the circumstances in which a particular corrective measure may be taken.141 A disadvantage of the narrow approach is that the legislature may overlook some worthwhile targets and leave them uncovered—for example, when the law addresses deficiencies in the financial condition of banks, while omitting other types of infractions, such as money laundering and other criminal activities. It is possible of course to cover bank crimes elsewhere in the law.
3. Corrective Action Plans
It is difficult to exaggerate the importance of the adoption and execution of a good corrective action plan. The outline of such action plans are given in the following example.
The law may require that a bank whose regulatory capital is insufficient submit to the bank regulator a capital restoration plan describing the steps that the bank will take to become adequately capitalized, the levels of capital to be attained during each year that the plan will be in effect, how the bank will comply with other corrective measures ordered by the regulator, and the types and levels of activities in which the bank will engage. The law may also specify standards that a capital restoration plan must meet before it may be accepted by the bank regulator; these may include that the plan is based on realistic assumptions, that it is likely to succeed in restoring the bank’s capital, and that it would not appreciably increase the risk to which the institution is exposed.142 Finally, the law may require corrective action plans to include standards by which the effects of the plan’s corrective measures on the bank’s condition are to be evaluated.
Although often corrective action plans may be unilaterally imposed by the regulator, sometimes the law requires that they be more or less negotiated between the regulator and the bank, taking the form of a plan submitted by the bank to the regulator for its acceptance.143
A negotiated corrective action plan has several advantages. It provides a consensual framework for corrective measures that is not merely imposed by the regulator from above but that is designed by or together with the bank concerned, promoting “ownership” in the plan on the part of the bank’s management and owners and minimizing responsibility of the bank regulator for its failure. It establishes discipline in identifying the needs of the bank, in designing the remedies responsive to those needs, in determining in detail the corrective measures required and the timetable for taking them, and in estimating the effects of the plan on the future condition of the bank. Finally, the plan offers an agenda for consultations between the bank and the regulator on adjustments to corrective measures as conditions change during the execution of the plan.
For these reasons, it is not difficult to see how a plan of action can help ensure the success of corrective measures. Unfortunately, however, corrective action plans do not figure prominently in banking laws.