Capital Directives: Obey 'Em or Else!

By Woodrough, Stephens B. | American Banker, June 25, 1991 | Go to article overview

Capital Directives: Obey 'Em or Else!


Woodrough, Stephens B., American Banker


Capital Directives: Obey 'Em or Else!

Banks concerned about minimum capital-ratio requirements should be alert to a court decision that will have major impact on the way the Federal Deposit Insurance Corp. and other regulators administer this regulation.

The May 13 decision, by the U.S. Court of Appeals for the Fifth Circuit, New Orleans, involves several important issues that had never been addressed by any other court.

This case focuses on the authority of the FDIC over the Bank of Coushatta. But the reasoning and conclusions expressed in the opinion will have an equal effect on the use of capital directives by the other bank regulatory agencies.

At issue is the FDIC's decision to issue a capital directive against a bank for failure to comply with the capital maintenance requirements set forth in the regulation.

What the Banks Lose

The Coushatta opinion makes three distinct conclusions regarding this decision:

* The bank is not entitled to any type of hearing before an impartial or neutral officer regarding the factual basis upon which the directive is predicated and/or the reasonableness of the terms of the directive.

* The bank is not entitled to obtain any type of judicial review of the decision and action of the agency to issue the capital directive.

* The issuance of a capital directive without the benefit of any hearing and without the right of any type of judicial review does not violate the due-process requirements of the Fifth Amendment of the Constitution.

The court determined that the FDIC's decision to issue a capital directive is final and unreviewable. Issuance of such a directive is therefore committed to the exclusive "discretion and expertise" of the agency. Period.

Legislative Background

The authority of federal banking agencies to issue capital directives is based on legislation enacted by Congress. It was expressly designed to overrule a decision of the same appellate court that issued the Coushatta decision.

The Comptroller of the Currency had sought to issue a cease-and-desist order against the First National Bank of Bellaire. This order required the bank, among other things, to maintain a specified minimum capital ratio.

The Fifth Circuit ruled in 1983 that this requirement in the order, for a minimum capital ratio, was not supported by substantial evidence.

Congress acted immediately to reverse the Bellaire decision with the enactment of the International Lending Supervision Act of 1983.

The lending supervision law authorizes each agency "to establish such minimum level of capital for a banking institution" as the agency "in its discretion, deems necessary or appropriate.

Role for Directives

It authorizes each agency to determine that the "failure of a banking institution to maintain capital at or above" the minimum level prescribed by the agency constitutes an "unsafe or unsound practice."

This 1983 law authorizes each agency to issue a directive requiring the banking institution to submit and adhere to an acceptable plan for achieving its required capital level.

The agencies were further authorized to interpret and define the terms used in the International Lending Supervision Act of 1983 and to prescribe rules and regulations or issue orders as necessary. …

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