 Honesty is the Best Policy.... Even when it comes to NPL's There used to be a time when the FDIC had the biggest stick to wield over bankers. The SEC just stole their thunder, with a significant ruling in a case against Regions Bank executives. The details of this case give bankers responsible for management of credit risk great ammunition for the next conversation they have with their executive management about appropriately risk rating a credit. To summarize the critical points, three Regions executives were charged with intentionally misclassifying loans that should have been recorded as impaired, which meant that the publicly traded company overstated its income and earnings per share in March 2009. The bank has cooperated with the investigation and taken remedial action, but they will still pay a $51Million fine to the SEC, Federal Reserve and Alabama Dept. of Banking. The 'whodunit' The head of Region's Risk Analytics Group was reported to be the principal architect of the scheme, and together with the head of Special Assets and the CCO, to whom they both reported, the three circumvented internal accounting controls and improperly classified $168M in commercial loans to avoid higher ALLL on those outstandings. The bank had procedures in place which required NPL's to be placed on non-accrual status if certain criteria were met. Staff had initiated these procedures to place these $168M of NPL's into non-accrual. The Risk Analytics head required those loans to remain on accrual, without any supporting documentation, and in direct conflict with bank policy. Both the Risk Analytics head and the CCO then knowingly provided understated NPL data to the CFO and other senior management at the end of Q1 2009. Two of these individuals got off easy - they have to pay a penalty of $70,000 each and are barred from serving as officers or directors of public companies for a period of five years. The Head of Risk Analytics, the ringleader as identified by the SEC, is being pursued further as litigation continues. He is charged with violations of antifraud, reporting, books and records, and internal controls provisions of the federal securities laws. And then what? When you read the details of the orders against these individuals, it has the making of a bad movie. Who wants to believe that successful bankers would stoop to asking subordinates to change the names of officers on documents, and try to cover up what might have originally been the result of honest human mistakes to this degree? Sadly, the temptations these individuals faced and succumbed to are ones that many bankers in public or privately held institutions around the country face frequently. Honesty and ethics are not givens, and the pressures to perform when results matter to so many can be incredibly difficult to withstand. Focus is often placed by regulators on having the 'systems' in place to prevent an individual's poor decision from impacting the bank. In fact, in their 2014 survey of bankers by Bank Director, sponsored by FIS, one of the findings was that more than half of bank officers believe that maintaining the technology and data infrastructure to support risk decision-making is a top risk management challenge. 1 Regions had these systems in place. These three individuals were not lacking for the data and information needed to make an informed and appropriate decision. What we see here is that even the best system will not prevent intentional misuse of management power, and a lack of support for the tough decisions. Often times, the individual in a Risk Management role is the internal 'bad guy', who has to deliver the bad news when it comes to changing loan classifications in such a way that serious financial impacts to the organization are the result. These individuals need to be able to 'call it like they see it', without concerns or fears of repercussions, either at the personal or corporate level. In fact they should be incented appropriately to do that, and make those tough calls the right way. It is the proverbial 'thankless job' and it shouldn't be, as this case demonstrates. The Regions team was obviously more concerned about the ramifications of recognizing an error in calculations at the board level, than about the ethical issue of falsifying information to cover that up. The message here is clear. Good systems will always be critical, and regulatory pressure to maintain them should not abate. In addition to having those procedures and systems, good people with appropriate direction and expectations are another 'must have'. Not only will the regulators be watching the portfolio for appropriate management and effective processes, but now for the institutions that are publicly held, they should realize that another sheriff is in town. To view the press release by the SEC, follow the link below: http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542168845#.U7RKhY1OW71 To view the results of the Bank Director's 2014 survey follow the link below: http://www.bankdirector.com/files/3313/9471/7237/2014_Risk_Practices_Survey_Report.pdf 1 Bankdirector.com | 
