It can, but rarely does, happen without warning or at least what are evident as clear warnings with the benefit of 20-20 hindsight. Regulatory enforcement actions typically follow a series of carefully calculated steps by which the agencies have provided some form of notice ranging from comments to MRA’s/MRBA’s in examination reports that they are becoming increasingly concerned about a certain issue, or issues, that the institution and its board and management are expected to address. When those issues continue to exist, or become even more exacerbated by interim action or inaction, the agencies feel that they have no recourse but to “turn up the heat” with increasingly severe actions eventually culminating in public enforcement actions which all institutions strive to avoid.

Granted it’s not always crystal clear in the presentation, but boards and management need to be on the lookout for telltale signs of impending problems cited through agency reviews, as well as through their own internal and external auditors and management. Early, immediate, proactive and preemptive action on the part of the institution to demonstrate that (1) they “hear” the concern, (2) they too are concerned, and (3) they are taking immediate action to address the concern helps immensely in mitigating (and perhaps avoiding altogether) any agency sense that their issues are being ignored and that therefore they must use a “bigger hammer” to get the bank’s attention. That preemptive action can serve to mitigate the plethora of shareholder, business and liability issues that can accompany a public enforcement action.  

Even seemingly minor and insignificant things, like the exit meeting with regulators where concerns are identified and actions threatened, followed by a response that the board and management will simply wait to receive the final report (or action) to respond, or that based on pending vacation schedules the agencies are requested to delay, simply serve to (1) reinforce the notion in the minds of the regulators that the institution is not taking their concerns seriously or with any sense of urgency or priority, and (2) reinforces the sense that a more severe action may be the only way to accomplish that goal.

In the current environment, time is not on the side of the bank in responding to identified existing or potential concerns. A prompt, credible and serious follow-up response by the board and management may make the difference between a public and a non-public enforcement action and can conceivably serve to avoid the action altogether. Those viewed as failing to promptly recognize and address problem issues will quickly find themselves in an increasingly hostile and challenging environment with the agencies which can often be avoided by simply listening and responding quickly.

Shareholder Issues

The board is placed on “notice” of regulatory concerns through the examination and enforcement process and conversations with agency personnel. Clearly the best defense is a strong and immediate offense through development and implementation of a proactive and preemptive strategic approach to resolving the issues as soon as possible. To do otherwise is to simply set the stage for enhanced regulatory enforcement actions.  

Proper management of the regulatory process is a key part of the role and responsibility of each director and each member of senior management. Prompt early recognition of existing or potential problems and development of processes to resolve the problems early on can save untold headaches (not to mention liability) in the long run. And it is a critical part of the enterprise risk management system of the institution as well.  

Regulator Communication

Perhaps one of the most important early actions that the institution can take is to identify an appropriate group of directors and executive management to initiate a direct dialogue, communicate, and meet in person directly with appropriate agency personnel to let them know that (1) they “hear” and understand their concerns, (2) they are immediately looking into those concerns, (3) they would appreciate further input and detail by the agencies with regard to the issues and how the agencies view their potential resolution, including success stories regarding similar situations with other institutions and (4) they will proceed with all due speed to address and resolve the issues. Follow up by the bank group is critical.  

Boards and management perceived as being “hostile” to the agency or which continue in a “denial” phase and are not likely to seriously address agency concerns do so at significant peril. It is rare that the agencies are really far “off” in their assessment of the situation (recall that they see many institutions) and that perception can lead to the sense that additional and more aggressive enforcement tools are required to get the job done.  

Immediate follow-up is critical, and keeping the lines of communication open with the agencies to discuss progress and actions taken can again mean the difference between a formal action and an informal action, and even perhaps a revisiting of a proposed CAMELS component or overall rating. Keeping in mind that the “M” in CAMELS can be a very subjective component and can reflect a number of subjective qualities, it is important to keep that number as low as possible and the perception of acknowledgement of problems as they occur and are identified is a key part of that credibility.  

Internal Communication

Boards and executive management should immediately establish an overall tone of non-confrontation and cooperation with agency personnel throughout the organization. If there are viable and credible disagreements with the agency (which can and does occur) those should be vetted, handled only at very senior levels, and involve board members so that the agency does not form a belief that the board is either uninformed, uninvolved or just not interested. Discussions should be mutually respectful and non-confrontational. A confrontational and dismissive tone is never productive, however, and can serve to enhance the sense of the agencies that a more severe action is necessary. Understanding and managing the relationship with the agencies is critical, and can make a very significant difference in how their concerns are handled. That tone should be set at the top and enforced internally throughout the organization. Whether real or not, and whether deserved or not, a regulatory sense of lack of recognition of problems, lack of cooperation by management or the board, or worse yet “hiding the ball,” can prove fatal.  


Especially with the benefit of 20-20 hindsight, many problems are obvious in the rear view mirror or, sadly, after the wreck has already occurred. The key is to pay attention to what agencies are saying, what auditors are saying, what employees are saying and what the market is saying about the credibility of your stock. “An ounce of prevention is worth a pound of cure,” and early, prompt and preemptive action in response to identified issues and potential problems can make all the difference in the actual impact of those issues and problems on the institution and its board and management. Retaining advisors who have been through these kinds of issues and who have strong regulatory credibility and governance experience to provide objective assistance can significantly shortcut the process and provide needed support and insights while helping to minimize risk and management distraction. Stay in touch with the regulators and, once a problem is identified, redouble your efforts to demonstrate sincere concern. Communicate your recognition of the problem as well as active and preemptive steps already in process to resolve the problem as quickly and effectively as possible, with ongoing controls in place to ascertain that it is not likely to reoccur once the immediate issues are resolved.

Those actions can make a significant difference in the outcome of the issue at hand, as well as the overall relations with agency personnel at a critical time in the economy and in bank regulation.