A Rise in Bank Enforcements: What This Means for Money Market Accounts

A recent article in American Banker reported that regulatory actions against banks hit a record level in 2009. The question is: is that good news or bad news?

For people with funds in money market accounts--or in savings accounts or CDs--you could argue the question both ways. Either way, the heightened level of enforcement actions suggests some insights about the fallout from the financial crisis.

Enforcement Actions By the Numbers

According to American Banker, in 2009, bank regulatory agencies filed 1,143 formal enforcement actions against banks and their holding companies. This was a record amount, more than double the 2008 total. There were also over 1,000 informal regulatory actions reported.

The tally of formal enforcement actions includes figures from the four federal organizations with responsibility for banking oversight: the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS). Of the four, the FDIC was most active in 2009, with 551 formal enforcement actions.

Good News, Bad News, and Other Implications

Is this level of enforcement action alarming? On the one hand, the high number of enforcement actions suggests widespread problems in the banking system, and seeing the total of enforcement actions more than double in the space of one year is disturbing. However, there is another side to the story.

To a large extent the jump in regulatory actions was inevitable as the flow of troubled banks in the wake of the financial crisis revealed a number of management issues which had contributed to the problems of those banks. While enforcement actions draw increased attention to those problems, they ultimately represent the effort to clean up the mess.

Also, there may be more to the stepped-up level of banking enforcement than just the urgent need to clean up the industry. Regulatory officials have come under intense media and congressional criticism for failing to do more in the lead-up to the crisis. Now, as lawmakers ponder different proposals for reorganizing banking oversight, the FDIC, Federal Reserve, OCC, and OTS are all concerned about protecting their respective turfs. Demonstrating that they are diligently pursuing their enforcement responsibilities is a big way of doing that.

For all of the above reasons, it seems that the jump in regulatory actions last year does not necessarily suggest that the banking industry is getting worse. Rather, it suggests that the industry and its supervisory officials are finally coming to grips with longstanding problems.

Effect on Money Market Accounts

In the end, how does all this affect money market accounts? Ultimately, it may be a positive sign. A heightened level of regulatory vigilance can help keep your deposits safer. Also, if active good judgement by regulators can effectively police the banks, it might head off the need for onerous new banking regulations. If new regulations go too far in reaction to the financial crisis, the resulting compliance burden could raise cost structures for banks. Among other things, that would probably mean lower money market rates and lower bank rates in general going forward.

The bottom line is that active regulatory enforcement could have done a great deal to prevent the financial crisis in the first place. The regulatory agencies missed that opportunity, but if it is coming around now, better late than never.

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