Federal Regulators Secretly Crack Down on Financial Institutions

U.S. banks, struggling to deal with the worst credit crisis facing the industry since WWII amid waning real-estate and credit markets, are coming under increased scrutiny from federal regulators, according to The Wall Street Journal.

The number of banks that have been put on probation this year has increased substantially when compared to years past, according to The Journal. The two main regulators of financial institutions, the Federal Reserve and the Office of Comptroller of Currency, have already released more memorandums of understanding this year than for all of 2007.

The memorandums are essentially secret agreements between the financial institution and the federal regulator that force banks to take steps to remain solvent. Those steps could include raising capital, tightening lending standards or suspending dividend payments. The agreements do not necessarily mean that a bank is failing, however, it is an early warning system about banks that appear to be in trouble financially. Typically the notices are used as a precursor to more severe and public action being taken.

As of June 17, 2008 the Fed had entered 32 memorandums with state-chartered banks and bank holding companies compared with just 31 last year. The OCC has entered agreements with nine national banks through Aug. 15, while entering only six in 2007. The Federal Deposit Insurance Corporation has entered into 118 memorandums this year. In all of 2007, the FDIC entered into just 175 of such agreements.

In addition, the FDIC has already placed 90 banks on a list of problem institutions through the first quarter and is expected to release and updated list sometime Tuesday. So far this year, nine banks have failed, with five of those failures coming since July 11. That includes the high-profile, California-based mortgage lender IndyMac as well as the Kansas-based Columbia Bank & Trust Co. which failed on Monday. Some analysts are guessing that the number of bank failures could approach 300 in the coming years.

Source Reuters:

Click Here For Solutions To America's Economic Problems

Click here to contact your Representative in Congress.

Spread this message with Digg, Del.icio.us, Reddit, or Stumbleupon, and subscribe to the RSS Feed to track articles