LITTLE ROCK — Informal sanctions are on the rise across the nation as banking regulators intervene earlier than in the past to prevent problems from getting worse.
Out of the 7,647 banks in the country, 2,724, or 35.6 percent, were under either a formal, publicized order or an unpublicized informal order last year, according to the American Banker, a trade publication. Of those, 1,668 were informal orders, up 34 percent from 2009.
Sanctions have risen because banks have had trouble recovering from the recession and the volatile real estate market.
The Federal Deposit Insurance Corp. did not reveal how many banks in Arkansas are under informal orders because doing so could help identify some of those banks, said David Barr, a spokesman for the agency.
Overall enforcement actions across the country reached a record level in 2010, affecting more than one of every three banks and nearly twice the number in 2009, according to the American Banker. The number of overall orders against banks was almost twice the number in 2009, the publication said.
In Arkansas, there are 15 banks under public sanctions from federal regulators, but a spokesman with the FDIC declined to say how many are under informal actions.
By the end of 2010, the Arkansas Bank Department had administered regulatory orders against 21 state-chartered banks, the same number as at the end of the third quarter, but not the same banks in all cases.
That makes 36 banks in the state known to be under sanctions. With 131 banks in Arkansas, 27 percent are under regulatory sanctions.
Two banks have closed since the recession began in December 2007 - ANB Financial in Bentonville in 2008 and First Southern Bank in Batesville last year.
It’s not likely the percentage of Arkansas banks informally sanctioned is at the national level of 35.6 percent,said Randy Dennis, president of DD&F Consulting Group, a Little Rock-based bank consulting firm.
“Arkansas is one of the healthiest banking states,” said Dennis, whose firm advises banks across the country. “But even in Arkansas, all of the regulators have tightened up, because there is a national trend to tighten up.”
Informal actions are common and are basically a slap on the hand, said Timothy Yeager, a professor of finance at the University of Arkansas at Fayetteville. The shortcomings aren’t a threat to the stability of a bank, Yeager said.
Yeager, who formerly worked for the Federal Reserve, said some informal orders involve situations such as not tracking existing loans carefully, not sending someone to examine a property site and not keeping up with appraisals.
“Those are things that happen in situations where you have fast growth,” Yeager said.
Federal and state regulators are focusing on banks’ capital levels and their safety and soundness, said Candace Franks, commissioner of the state Bank Department.
“Because of the economic conditions, there probably has been less benefit of the doubt in the examination process than there was,” Franks said.
Bank regulators are focusing more on prevention, said Garland Binns, a banking lawyer with Dover Dixon Horne in Little Rock. Regulators might tell a bank of problems during an initial examination, he said.
“Maybe no action will be taken at that time,” Binns said. “But if [the regulators] come back in a follow-up exam and see that it is still an issue, I think there is more than a good chance that [the bank] would go under some type of informal order. And, of course, if they are below the acceptable [capital] lines, then [the bank] will get a formal order.”
There have been about 340 bank failures nationally since 2008, the most since the savings and loan crisis of the 1980s and 1990s, when more than 500 banks closed.
“We lost an entire [savings and loan associations] industry then,” Dennis said.
Larry Wilson, chairman and chief executive officer of First Arkansas Bank & Trust of Jacksonville, said it’s possible regulators are trying to reduce the number of the banks in the country.
“Either by design or default, it appears to me that’s what’s happening,” Wilson said. “I think the regulators have made some serious errors in the past by not slowing down the expansion over the last 10 years.”
When the U.S. Office of the Comptroller of the Currency approved a new bank opening in Mountain View in 2009 - Ozark Heritage Bank - Wilson wrote to the federal regulator, suggesting that the city of about 3,000 people already had more banks than it needed. At the time, there were six branches in the town.
“About a year later [in August 2010], Ozark Heritage Bank received a [consent order],” said Wilson, whose bank does not have a branch in Mountain View. “I let [the federal regulator] know exactly what I thought - that they simply couldn’t say no [to new bank applications]. If there are too many banks, it is[regulators’] own fault. They approved them all.”
Ron Sims, chief executive officer at Ozark Heritage, declined to respond to Wilson’s comments.
Business, Pages 63 on 02/20/2011