Recent disclosures — both authorized and otherwise — of supervisory activities have reignited a debate over the secrecy standards applied to such information.
Republicans on the Senate Banking Committee are
Banks and their allies say the leaks, coupled with the deliberate release of
"A regime that really is intended to protect a candid back and forth between banks and their regulators and to protect bank's sensitive commercial and proprietary information has been, somewhat perversely, converted into a shroud of secrecy that principally serves to insulate the regulators' actions from public scrutiny," said Jeremy Newell, a senior fellow at the Bank Policy Institute, a lobbying organization for large banks.
Banks argue that various forms of supervisory guidance — including the issuance of so-called matters requiring attention, or MRAs, and matters requiring immediate attention, or MRIAs — are being used in lieu of more public actions, such as rulemakings or enforcement actions, to
Along with the actions taken against seven banks — Citizens Financial Group, Fifth Third Bancorp, M&T Bank Corp., KeyCorp, Huntington Bancshares, Regions Financial Corp. and First Citizens BankShares — the Bloomberg article also noted an "onslaught" of similar activities by Fed examiners against banks with more than $100 billion of assets since the failure of Silicon Valley Bank in March.
Banks say this uptick is emblematic of regulators' ability to scale the intensity of their supervisory actions on a whim behind the protective curtain of CSI.
"It allows the examiners to have far more discretion and take some liberties that they wouldn't if they knew their exam reports were viewable," said Anne Balcer, senior executive vice president and chief of government relations and public policy for the Independent Community Bankers of America.
Some observers argue that claims about CSI being used to obfuscate the movement of supervisory policy ring hollow. Todd Phillips, a law professor at Georgia State University and former Federal Deposit Insurance Corp. lawyer, said banks have avenues for contesting supervisory actions if they feel they are unwarranted.
"If they are really concerned that supervisors are going too far, they can appeal. Every agency has a process for appealing material supervisory determinations, and they can use that process," Phillips said. "The fact that they are talking to the press rather than taking it through the legal process tells me that there's something to what their supervisors are saying in their MRAs and banks are just upset about it."
Potential motives for the recent leaks are difficult to ascertain. In their letter to the Fed, Senate Banking Republicans make the case that the leaks came from the central bank to demonstrate a more aggressive approach to supervision. Such a theory undermines the banking sector's belief that examiners benefit from operating in the shadows.
Others suggest the banks or their representatives could have disseminated the information to open the Fed up to criticism, but such an orchestrated act would expose involved parties to significant penalties, including bans from banking and criminal prosecution. Banks often cite the complications of sharing CSI with their attorneys, consultants or even their corporate holding companies among their gripes against the current regime.
A spokesperson for Sen. Thom Tillis, R-N.C., the highest-ranking member of the Banking Committee to sign the letter, said the lawmakers had not received a response to their letter as of Monday morning. Sen. Tim Scott, R-S.C., the top Republican on the committee and a presidential hopeful, did not sign the letter, but Ryann Durant, a spokesperson for Scott, said he is tracking the issue independently.
"Ranking Member Scott takes oversight of our agencies seriously, and on this issue, he wanted to receive a briefing directly from the Federal Reserve, which his staff did on September 22nd," Durant said in a statement to American Banker. "He continues to rigorously monitor how the Fed handles confidential supervisory information, and he appreciates Banking Committee Republicans' attention to this issue."
A Fed spokesperson declined to comment on the status of its response to the senators' inquiry.
Regardless of who is behind the leak, Aaron Klein, a senior fellow of economic studies at the Brookings Institution, said the episode raises an important question about the reach of the CSI designation.
"Rather than point fingers at each other as to who leaked, step back and ask the question: Should this information be kept secret in the first place?" Klein said. "The level of secrecy around bank supervision is too high. Unfortunately, both banks and their regulators have incentives to keep information about supervision a secret. As a result, too much is kept from the public allowing both banks and their regulators to escape accountability for their errors."
Klein is a proponent of making public the aggregate scores banks are given based on capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk, abbreviated as CAMELS.
He argues that the FDIC's quarterly report on the aggregate assets at troubled banks would essentially identify the largest banks should their supervisory marks decline. Making all aggregate CAMELS scores public, Klein said, would bring added accountability to both banks and their regulators.
Most banks and their representatives, however, would rather such information be shielded from the general public. A more palatable version of CSI reform would focus on making the designation more navigable, said David Sewell, a partner at the law firm Freshfields and a former lawyer for the Federal Reserve Bank of New York.
Sewell said the three federal prudential bank regulators — the Fed, FDIC and the Office of the Comptroller of the Currency — and the Consumer Financial Protection Bureau and various state-level bank regulators all have their own definitions and standards for what constitutes CSI as well as their own requirements about the conditions under which the materials can be shared, even with other regulatory agencies.
"The definition of what is CSI is so broad that almost anything touching the supervisory process can be considered CSI, including factual documents and conversation with regulators," Sewell said. "It would be helpful if the regimes were harmonized on the definition of what is CSI, if there was clarity of what that definition is and if there was a common mechanism for sharing it between agencies."
By law, CSI is owned by the agency, a distinction that allows the material to be shielded from the Freedom of Information Act, which typically makes all correspondence with the government available to the public upon request. To the frustration of banks, this designation trumps other protective legal mechanisms, such as attorney-client privilege and conversations held under nondisclosure agreements.
Cliff Stanford, a partner with the law firm Alston & Bird and a former Atlanta Fed lawyer, said this status is particularly cumbersome during merger and acquisitions discussions, in which banks must contend with CSI rules while still attempting to be forthcoming with potential counterparties about ongoing issues.
"In the context of an M&A transaction, we have to be very careful not to disclose CSI to a counterparty, even though there's a nondisclosure agreement, even though there's diligence underway to assess whether or not a transaction makes sense," Stanford said. "That just tests the definitional coherence of what is CSI and what is not."
Recent years have seen moves to apply more transparency to certain types of CSI, especially at the Fed. In 2018, the central bank began releasing a quarterly report on supervision and regulation, which includes a wide range of industry-level information, including the overall number of outstanding supervisory findings. Even the disclosure of wide swaths of the supervisory record on Silicon Valley Bank in the years leading up to its failure represented a level of openness not previously seen.
Stanford said these efforts at transparency have encouraged parties in and around the banking sector to think about CSI differently.
"CSI has gotten increased attention from the banks, their supervisors, policymakers, media and investors. It's become something that's been raised in the consciousness, potentially because the added transparency has led to additional curiosity," he said. "It may also lead to further assessment of whether there is information that can be disclosed if there are additional guardrails put in place."
Sewell said the Fed's progress on bringing transparency to its monetary policy actions could be a model for updating its approach to supervisory disclosures. Much like the Federal Open Market Committee releases information from its meetings over time, first as minutes and then later as a full transcript, he said supervisory information could similarly be disseminated in a way that mitigates its potential impact.
A swift change in disclosure policy would likely lead to bad outcomes for banks, he said, but a gradual transition to a more open regime could allow regulators to share more information about supervisory actions at specific banks without panicking depositors or investors.
"More frequent disclosures about MRA findings could destigmatize it over time, if it were done in an orderly way," Sewell said.
But Phillips said there is a reason why regulators take such a strict approach to confidentiality. He noted that even if banks were to disclose positive information about their supervisory treatment, this could have residual effects on the parts of the sector with less favorable marks.
"If some banks start advertising that regulators have given them a clean bill of health, institutions that don't do that may be seen as not having a clean bill of health," he said. "It creates an incentive that everyone has to disclose information."
Jeremy Kress, a law professor at the University of Michigan and a former Fed attorney, said there are merits to arguments for and against changing the rules around CSI, but he does not anticipate changes anytime soon.
While some argue that agencies can work among themselves or through the interagency Federal Financial Institutions Examination Council to create a more unified framework for defining and handling CSI, Kress and others believe getting the agencies to do so would take an act of Congress.
"It's a complex debate that has no easy answers," Kress said. "Any reforms would have to come from Congress, so you can reach your own conclusion about how likely that is."
