August 24, 2019

Tenth Circuit: Petition for Review From Order of FDIC Denied

The Tenth Circuit published its opinion in Frontier State Bank v. Federal Deposit Insurance Corp. on Wednesday, December 26, 2012.

In 2002, Frontier State Bank (Frontier) began using a “leverage strategy” under which it funded long-term investments with short-term borrowing to generate profits from the difference (“spread”) between long-term and short-term interest rates. This strategy caused significant concern for bank examiners at the Federal Deposit Insurance Corporation (FDIC). After raising the issue with Frontier several times and being dissatisfied with Frontier’s response, the FDIC sought a cease-and-desist order to keep it from executing its leverage strategy in an unsafe or unsound manner. After a hearing, an ALJ concluded Frontier had engaged in unsafe or unsound practices and recommended a cease-and-desist order that addressed specific issues. The FDIC Board adopted the ALJ’s proposed order and Frontier filed a petition for review with the Tenth Circuit, contending the Board’s order was arbitrary and capricious.

In its order, the Board imposed a 10% tier 1 leverage capital ratio. The Tenth Circuit held that it could not review this part of the order because decision-making on a capital requirement was committed to the FDIC’s sole discretion by the International Lending Supervision Act of 1983. The court had no meaningful standard to use to review the Board’s decision. The court held that the other challenged items in the order were all supported by the ALJ’s findings and his conclusions were reasonable so the Board’s order was not arbitrary or capricious. The court denied Frontier’s petition for review.

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