With the anniversary of September 11, 2001 approaching, in addition to remembering the loss of lives, we also want to take a fresh look at how the events of that day forever changed not just the human landscape, but the banking landscape in the U.S. as well. Specifically, the USA Patriot Act was enacted, criminalizing the act of financing terrorism.

In the 23 years since, there has been no shortage of enforcement activity against banks that lack sufficient safeguards against money-laundering, let alone money-laundering for use by terrorists.

There are currently more than 50 banks operating under such actions, most can be found on page 5 of this week's Jumbo Rate News.

How 9.11 Changed the Banking Landscape

The FDIC released its 2nd Quarter Quarterly Banking Profile on Thursday, September 5, 2024, and as usual, they found something in the data they could put a positive spin on. FDIC-insured institutions reported net income of $71.5 billion in the second quarter, which was up $7.3 billion from the first quarter.

That is good news, no question, but there is much more to the story. For instance, overall noncurrent loans held steady from the first quarter at 0.91% (also good news). However, at 1.77%, the noncurrent rate for commercial real estate (non-owner occupied) is now at its highest level since 2013.

Loan charge-offs are up as well from 0.65% to 0.68%. This is also the highest rate reported since 2013 and 20 basis points (bps) higher than the pre-pandemic average. At 4.82% in the second quarter, credit card net charge-offs were up 13 bps from the first quarter and are now at their highest rate since 2011.

Over 82% of the banking industry reported annual loan growth and, while loans grew in almost all categories, consumer lending was among the strongest. Of particular concern are: a) credit card loans, which increased by $77 billion or 7.5% from a year earlier; and b) adjustable rate 1-4 family residential mortgage loans, which increased by $69.3 billion (also 7.5%) over the year. These are areas we will be paying particularly close attention to in the coming weeks and months.

For now, as we approach the anniversary of the September 11, 2001 terrorist attacks (JRN 18:36), we thought we’d take a fresh look at how the events that unfolded that day have forever changed the banking landscape in the U.S.

The fight against money laundering had long been a priority for the U.S. Treasury. Pre-9/11, the Bank Secrecy Act (BSA), established in 1970, was the most effective and comprehensive tool we had to combat it. Then, post 9/11, the USA Patriot Act was enacted, which finally criminalized the act of financing terrorism.

This was not the first time the BSA had been broadened, but for the first time all financial institutions were required to have due diligence procedures in place to combat money-laundering (AML), improve information sharing and allow for the imposition of “special measures” on institutions and/or transactions of concern. In the 23 years since, there has been no shortage of “special measures” imposed. The pace of those measures appears to be accelerating.

All banks listed on page 5 are currently operating under such measures (i.e. enforcement actions). These actions address BSA, AML, and/or Countering the Financing of Terrorism (CFT) as it is often referred to today. This is not a comprehensive list. For example, many banks are simply issued a civil money penalty for their lapses in  compliance, rather than an ongoing enforcement action. These instances are not included on the page 5 list. There are also cases where the BSA portion of the enforcement action was minor. We took some discretion in deciding which banks to include (mainly for spacing reasons).

With the advent of digital currencies and growing fintech-bank partnerships, this list is apt to keep growing. Since the failures of Signature Bank and Silicon Valley Bank in the spring of 2023, as well as the collapse of some very high profile crypto and fintech companies, regulators have increased their scrutiny of partnerships between federally-insured institutions and unregulated entities.

Regulators are making it very clear: outsourcing any of a bank’s functions does not diminish the bank’s responsibility to ensure proper controls, identification and monitoring of transactions and customers.  You will find the following phrase included frequently in these actions: “The board has the ultimate responsibility for proper and sound management of the bank.”

That is very true, and while that is a common theme, there are others that are less common but more severe, In 2020, 4-Star CBW Bank, Weir, KS was ordered to terminate all activity pertaining to foreign financial institution customers—including ACH transfers. CBW was also ordered to develop and implement risk-based procedures for customers when opening, renewing or modifying accounts. This customer due diligence is intended to enable the bank to understand the nature and purpose of the customer relationship.

Long-time JRN readers should understand that this scrutiny, which began in 2001, has become increasingly more burdensome for banks ever since. This is why it has become so difficult to open a corporate certificate of deposit (CD) from out of state. The amount of “new” money has to be sufficient for the bank to justify the increased workload. Very often, it is not.

Consumer accounts are less burdensome. All documentation can be sent easily via the internet and confirming the responsible party, (one (or two) account owners) is much easier than sifting through corporate docs. This is, sadly, the world we live in post 9/11.