The Financial Institutions Reform, Recovery and Enforcement Act, enacted in 1989, was primarily focused on addressing the thrift crisis of the 1980s. As a result, many provisions dealt with changes to the supervisory and deposit insurance structure facing that industry and funding the resolution of failing thrifts. Title 9 of FIRREA expanded supervisors' enforcement powers. Key enhancements to enforcement powers as a result of FIRREA were the following:
- Introduced the term "institution-affiliated party," which clearly listed individuals who could be subject to enforcement actions based on their status (for example, employees, officers, directors and principal shareholders) and added applicability to independent contractors (including attorneys, appraisers or accountants) under certain conditions.
- Explicitly granted supervisors the authority to require affirmative actions (including making restitution, restricting growth, disposing of assets and rescinding contracts) in cease and desist orders.
- Lowered the standard of harm needed to support issuance of a temporary cease and desist order and added a provision allowing issuance of a temporary cease and desist order for incomplete or inaccurate books and records.
- Expanded removal and prohibition actions to prohibit future participation at any insured institution.
- Substantially increased the size of potential civil money penalties, to a maximum of $1 million per day.
- Expanded the scope of transgressions that could lead to civil money penalties to include violation of any law or regulation, order, condition imposed in writing in connection with an application, or "any written agreement" between the institution and the supervisory agency.
- Required that final enforcement orders be made public (expanded to include all formal enforcement actions in the Crime Control Act of 1980).
The Federal Deposit Insurance Corporation Improvement Act was enacted only two years later, in December 1991. Its primary focus was recapitalization of the deposit insurance fund and reform of the process used to address failing institutions. FDICIA's impact on enforcement powers was generally indirect in that rather than explicitly expanding enforcement powers, it focused on enhancing supervision of financial institutions by requiring supervisors to issue safety and soundness standards, mandating annual examinations and requiring larger institutions to engage external auditors and attest to the sufficiency of internal controls. The principal additions to the enforcement tool kit resulted from the Prompt Corrective Action provisions, which require supervisors to take a series of actions in response to declining capital levels, including potentially closing an institution prior to insolvency.
One notable omission from both statutes is an effective solution to the problems surrounding the perception that certain institutions are too big to fail. While FDICIA took some steps in this area, most commentators believe those steps to be ineffective. The issues surrounding TBTF are outside the scope of this article. For a detailed discussion of the issues surrounding TBTF, see Gary Stern and Ron Feldman, Too Big To Fail (Brookings Institution Press, 2004).
[Excerpts from Too Big To Fail: The Hazards of Bank Bailouts in The Region, December 2003.]