A review of the 2016 failure of Mulberry, Ark.-based Allied Bank revealed confusion among Federal Reserve Bank and Federal Reserve Board staff over the filing of suspicious activity reports and interagency communications.
The Office of the Inspector General for the Federal Reserve and the Consumer Financial Protection Bureau noted that Allied's failure had been due to ineffective board oversight, the dominant influence of two executives and asset quality deterioration. The OIG also argued, however, that the Federal Reserve Bank of St. Louis could have done more to intervene. Specifically, it could have recommended that the Fed Board report suspicious activity to law enforcement when the Reserve Bank first noticed signs of insider abuse.
The St. Louis Fed, in fact, had "identified numerous unsafe and unsound banking practices and alleged insider abuse" as early as 2012. The following year, it recommended removal, prohibition or civil money penalties against certain Allied executives. From 2009 to 2016, it "generally took decisive supervisory action," including the downgrade of Allied's CAMELS composite rating, the issuance of enforcement actions, an increase in the frequency of examinations and the assignment of more experienced regulatory staff to those examinations. But it also failed to push for the filing of a suspicious activity report until after the bank's failure, and the Allied executives it had wanted to penalize were able to keep their positions.
Fed Board and Reserve Bank staff had been confused, according to the OIG's report, about when a suspicious activity report could be filed. The St. Louis Fed also expressed frustration at the lack of updates from the Fed Board's legal division regarding its recommendation for penalties; the legal division, in turn, argued that the Reserve Bank could have followed up more often to demonstrate urgency.
The OIG, following its review, recommended that the Fed's director of supervision and regulation clarify guidance and conduct training on suspicious activity reporting. It also recommended that the Fed's general counsel clarify expectations regarding communications following enforcement action requests.
The Fed Board concurred with the OIG's recommendations. The OIG has already noted several improvements in line with its recommendations.
Allied's failure resulted in an estimated $6.9 million loss to the Deposit Insurance Fund. It was acquired by Mathias Bancshares Inc.'s Today's Bank.