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Report Fraud, Waste, or Abuse
Board Report: April 12, 2012
The FDIC estimated that Bank of the Commonwealth's failure would result in a $268.3 million loss to the Deposit Insurance Fund (DIF), which exceeded the $200 million materiality threshold that applied at the time of notification by the FDIC OIG. Our review sought to determine why the Bank of the Commonwealth's failure resulted in a material loss to the DIF and assessed Federal Reserve Bank of Richmond's (FRB Richmond) supervision of Bank of the Commonwealth during our period of review, 2000 through 2011.
Bank of the Commonwealth failed because of the convergence of several factors, including corporate governance weaknesses, an aggressive growth strategy that resulted in concentration risk, insufficient credit risk management practices, and pervasive internal control weaknesses. These factors, combined with deteriorating real estate markets, led to rapid asset quality deterioration. Bank of the Commonwealth did not acknowledge the full extent of problem loans in its portfolio and adequately reserve against prospective losses. It also engaged in unsafe and unsound banking practices to mask its financial condition. Mounting losses depleted earnings and eroded capital, which prompted the Commonwealth of Virginia State Corporation Commission, Bureau of Financial Institutions to close the bank and appoint the FDIC as receiver on September 23, 2011.
Our analysis of FRB Richmond's supervision of Bank of the Commonwealth for the review period revealed that examiners identified the bank's fundamental weaknesses but did not take early, forceful supervisory action to address these weaknesses. Additionally, we determined that FRB Richmond did not comply with examination frequency requirements and guidelines for our period of review.
We recommended that the Director of Banking Supervision and Regulation (BS&R) ensure that FRB Richmond improves its supervisory activities by confirming that examination reports are consistent with Commercial Bank Examination Manual standards, assuring staff impartiality, and training FRB Richmond staff on the code of conduct. We also recommended that the Director of BS&R consider creating guidelines outlining when examination supervisors should refer to prior enforcement actions when developing a supervisory strategy for an institution that requires an enforcement action and issue supplemental guidance reiterating the unique circumstances in which a Reserve Bank should file a Suspicious Activity Report. The Division Director stated that BS&R staff concurred with the conclusions, lessons learned, and recommendations in the report.