Frontier State Bank Oklahoma City v. Federal Deposit Insurance
702 F.3d 588
10th Cir.2012Background
- Frontier State Bank used an ongoing leverage strategy funded by short-term borrowing to invest in long-term assets, creating significant interest rate risk.
- FDIC examiners expressed ongoing concerns during examinations, leading to a cease-and-desist order to mitigate leverage strategy risks.
- The FDIC required a leverage capital ratio of 7%, development of an interest rate risk model, risk limits, and liquidity plans in a memorandum of understanding (2004).
- After repeated concerns through 2008, the FDIC filed charges and amended them to allege unsafe practices in capital, liquidity, risk management, and leverage strategy execution.
- An ALJ recommended a cease-and-desist order addressing capital, interest rate risk, liquidity, and asset/liability management; the FDIC Board adopted the ALJ’s order, and Frontier challenged review in this court.
- The district court denied Frontier’s petition for review of the FDIC Board’s order, and Frontier appeals to this court.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the FDIC could set a 10% tier 1 leverage capital ratio and review it judicially | Frontier: capital levels set by ILSA are reviewable | FDIC: setting capital levels is unreviewable; discretionary | Capital decision unreviewable; no meaningful standard to review |
| Whether Frontier was exposed to excessive interest rate risk based on modeling | Frontier: earnings and ALX models adequate; Bloomberg data criticized | FDIC: risk models inadequate and unreliable for leverage strategy | Board’s finding of excessive interest rate risk reasonable |
| Whether liquidity findings, including the 45% dependency ratio, were supported | Frontier: no objective basis for 45%; ALJ found not tied to evidence | FDIC: dependency ratio reasonable given leverage strategy | Liquidity findings supported; 45% ratio reasonable |
| Whether Frontier management findings were supported | Frontier: management not shown to be unsafe or unsound | FDIC: management failed to adhere to policies and mitigate risk | Board's management finding not arbitrary or capricious |
Key Cases Cited
- First Nat’l Bank of Bellaire v. Comptroller of Currency, 697 F.2d 674 (5th Cir. 1983) (capital directives pre-ILSA not reviewable; defer to regulators)
- Bank of Coushatta, 930 F.2d 1122 (5th Cir. 1991) (capital directives unreviewable; lack meaningful standard)
- Webster v. Doe, 486 U.S. 592 (1988) (statutory language limits judicial review when terms give deference to agency judgment)
- Heckler v. Chaney, 470 U.S. 821 (1985) (limits judicial review where statute commits discretion to agency without standard)
- Madigan, 14 F.3d 1444 (10th Cir. 1994) (discretion in capital decisions insulated from review)
- Sunshine State Bank v. FDIC, 783 F.2d 1580 (11th Cir. 1986) (deference to regulator decisions under zone of reasonableness)