Fed Puts Four Banks on Short Leash

By Tim Holland

The FED announced on March 24, 2009 that it has entered into a written agreement with four more banks. Such agreements are usually entered into when it is deemed that a banking company’s financial position does not meet the minimum Federal Reserve System’s requirements. The banks involved consist of three in Minnesota and one in Oregon.

Unlike the Federal Deposit Insurance Corporation (FDIC), which has the capability of taking over and operating a bank in receivership, the regional district Federal Reserve Banks perform a monitoring function to assure a healthy banking system.

The written agreements involve two banks in the Federal Reserve System located in Minneapolis and San Francisco. The Federal Reserve Bank of Minneapolis which entered into agreements with Spring Grove Investments (which owns and control Jennings State Bank, Spring Grove, MN and various non-bank subsidiaries); Pine City Bancorporation, Inc., Pine City, MN (which owns and controls Horizon Bank, Pine City and a non-bank subsidiary) and BancMidwest Corporation, St. Paul, MN (which owns and controls Mainstreet Bank, Forest Lake, MN, White Rock Bank, Cannon Falls, MN and various nonblank Subsidiaries.

The other Reserve Region is the Federal Reserve Bank of San Francisco, San Francisco, CA which entered into a written agreement with Columbia Commercial Bank, Hillsboro, Oregon (which owns and controls Columbia Community Bank, Hillsboro and various non-bank subsidiaries. The Oregon Department of Consumer and Business Services, Division of Finance and Corporate Securities, Salem, OR was also a party to the agreement.

All of these banks are state chartered banks and are not members of the Federal Reserve System.

Written agreements of this type are designed to establish firm rules and regulations under which the bank will be permitted to stay in business as long as they conform to the terms of the agreement. A typical agreement usually forbids the distribution of dividends without approval of the Reserve Bank; prohibits any action that would further reduce the capital of the bank, and imposes restrictions on the non-bank subsidiaries.

Going forward, the bank will be required to provide the Reserve Bank with detailed progress reports showing compliance with the terms of the agreement..

There have been 20 such agreements executed thus far this year between Federal Reserve Banks and various types of bank holding companies.