Magazine article American Banker

Treasury IG: OCC Missed Trouble at Failed W.VA. Bank

Magazine article American Banker

Treasury IG: OCC Missed Trouble at Failed W.VA. Bank

Article excerpt


The Office of the Comptroller of the Currency should have been more aggressive in its supervision of First National Bank of Keystone, which failed last year at an estimated cost to the Bank Insurance Fund of $750 to $850 million, according to a report issued Monday by the Treasury Department.

"The supervisory history of Keystone points to a potential fundamental weakness in the OCC's examination process," the Treasury's Office of the Inspector General found.

In careful language short of an outright indictment, the report found that the agency's examiners may have placed too much emphasis on the bank's own audited financial statements, and that exam procedures may be insufficient to detect fraud.

Exams performed between 1992 and 1999 "repeatedly uncovered unsafe and unsound banking practices and regulatory violations." Yet OCC enforcement actions were "largely ineffective" in fixing the bank's problems.

"Alleged fraudulent accounting practices, uncooperative bank management, and reported high profitability may have all served to mask the bank's true financial condition from OCC examiners," according to the 51-page report. "Despite this, indicators existed throughout the period that may have dictated a more aggressive supervisory response from the OCC."

Keystone of Keystone, W.Va., was a $107 million-asset bank in 1992, but it grew to $1.1 billion by last year. The OCC declared the bank insolvent on Sept. 1 after discovering that management could not account for $515 million in loans. It appears the loans were sold, but the bank did not record the sales. Federal law enforcement agencies are investigating the failure for possible prosecutions.

Keystone's rapid growth was fueled by underwriting and then securitizing subprime loans. The decision to close the bank was made after the OCC attempted to independently verify Keystone's assets by contacting loan servicing companies. …

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