Ethics Metrics maps, models and rates asymmetric information on confidential supervisory information (CSI) to reveal a range of performance based on a rating scale of 1 to 5. CSI includes exam ratings and related enforcement actions that are known by bank regulators and bank management but is rarely disclosed to the public based on federal bank regulations.
CSI addresses material compliance violations that qualify for termination of FDIC insurance and formal enforcement actions (FEAs) or regulatory events that are defined as events of default in credit/fixed income agreements. Disclosure of FEAs for small DIHCs, with assets below $10 billion, led to a 55% default rate for 552 small DIHCs during 2002 to 2015. FEAs, during the same time frame, were rarely disclosed for large DIHCs (assets above $10 billion).
Disclosure of this information is required by SEC laws and regulations but is often omitted by large DIHCs under the federal bank regulation 12 U.S.C. § 1818(u)(1) because it represents events of default in credit agreements and potential triggers for danger of default, default and additional systemic risk and orderly liquidation for large interconnected DIHCs.
Investors are advised in many 10-K’s that “Regulatory oversight is established to protect depositors, the Federal Deposit Insurance Fund and the banking system as a whole, not security holders”. Consistent with this public policy and based on federal bank laws and regulations, CSI is material information for investors that is omitted in apparent violation of federal securities laws.
Adding to the confusion for investors is that nearly all large DIHCs state consistently that they are in compliance with all laws and regulations through its Code of Ethics (SOX 406), have not omitted any material facts in SOX 302 and 906 disclosures and that internal control over financial reporting (ICFR) is effective.
These affirmations, in many cases, mislead investors as they mean that the DIHC is not at risk of one or more material weaknesses. These include material misstatements or omissions of material information, ineffective board oversight of ICFR, restatements and fraud.
Ethics Metrics brings transparency to these issues through its DIHC reports for the covered DIHCs that own about 80% of the total assets of the U.S. banking industry.