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Indiana Law Journal

Document Type

Essay

Publication Date

Winter 2023

Publication Citation

99 Indiana Law Journal 289 (2023)

Abstract

Enforcement is how agencies make policy, but the Federal Reserve Board, perhaps the country’s most important independent agency, and certainly its most important regulator of banks, does most of its enforcement in secret. This secrecy means that it is difficult for outside observers to see what the Fed is prioritizing. One exception to the secret sanction paradigm is the civil monetary penalty: once the Fed decides to fine a bank or a banker, no matter how small the amount, it must publicize the fine and the basis for it. We read twenty-five years’ worth of civil monetary penalty orders to see what they could tell us about the Fed’s priorities. The results are instructive. The Fed has slowed its sanctions of bankers and increased the number of sanctions on banks, especially beginning in the second term of the Obama Administration. Foreign banks have paid a disproportionate number of penalties, also especially the case recently. Small banks essentially only pay small fines for violations of the National Flood Insurance Program, by far the most common sort of enforcement action. Large banks, even more recently, are more likely to pay large fines for violations of anti-money laundering, bank secrecy, or international sanctions. The data provides some evidence that the Fed does not prefer big banks to small ones, despite the conventional wisdom to the contrary. In each of these categories, the Fed is not really pursuing its own mission to ensure that banks are safe and sound. Instead, it is acting as an agent pursuing the objectives of a different principal, be it improving the financing of the flood insurance program, assisting the national security community, or joining other law enforcement agencies on an anti-fraud campaign. That conclusion in turn suggests that the Fed is more comfortable pursuing its own policy objectives with more opaque forms of enforcement and supervision.

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