TD Bank settlement shows that asset caps are here to stay

For the second time ever, an asset growth cap has been applied to a banking organization in the U.S. because of regulatory violations. Experts say that the move, while extreme, could indicate that regulators are prepared to deploy it when they feel it is warranted.

The Office of the Comptroller of the Currency has capped the growth of the two U.S. subsidiaries of TD Bank Group after the Canadian firm pleaded guilty to felony money laundering changes on Thursday. 

As a result, TD Bank National Association and TD Bank USA National Association will be prohibited from exceeding consolidated asset holdings totaling roughly $434 billion.

The move was a forceful response to a problematic pattern of banking behavior, the agency said. It was also a manifestation of Acting Comptroller Michael Hsu’s pledge to use growth restrictions as a tool for compelling banks to address long-running compliance issues. 

“When a bank is on notice that certain deficiencies need to be fixed and they don’t get remediated on time or new things break, the OCC will actively consider imposing growth restrictions,” Hsu said in a January 2023 speech on “too big to manage” banks.

The growth cap is part of a sweeping set of regulatory and criminal penalties imposed on TD Bank for enabling hundreds of millions of dollars from drug trafficking and other illicit activities to flow through the U.S. banking system and, ultimately, to cartels in Mexico and China. In total, the bank will have to pay more than $3 billion in fines and make broad changes to its compliance functions.

In its consent order, the OCC noted that TD “repeatedly failed to take appropriate and timely corrective action to address the highly suspicious activity and failed to properly emphasize BSA/AML compliance,” implying that the bank met the “recidivist” standard set out in Hsu’s speech from last year, though it was not clear to what degree the agency’s examiners flagged the issue in their supervisory processes. An OCC spokesperson declined to comment on the matter. 

Some observers are frustrated by the lack of documentation regarding the regulatory steps taken leading up to asset cap. David Zaring, a law professor at the University of Pennsylvania’s Wharton School of Business, said that while it was implied that supervisors raised these issues, he would like to know more.

“What’s going on here may be completely serious and worthy of some real punishment, it’s just hard to know,” he said. “In some ways, we have to take on faith that the government knows what it’s doing here.”

The Department of Justice — which handled the criminal proceedings — and the Financial Crimes Enforcement Network, known as Fincen, shared more detailed accounts of actions by individual bank employees and executives. Bank regulators are more restricted in what information they disclose publicly about institutions they supervise.

Others take it as a given that the OCC would have repeatedly raised the issue with TD. Mayra Rodríguez Valladares, an independent financial regulation consultant, said examiners could have been raising concerns about AML/BSA compliance for years before the agency elected to make this move.

“[The asset cap] tells me that the problems at the bank have been going on for quite a while,” Rodríguez Valladares said. “Otherwise the OCC wouldn’t come down with such a hammer.”

Growth limitations are a common regulatory response to issues related to capital deficiencies, though in those cases they tend to be narrower limitations around dividend payouts and stock buybacks, or prohibitions from certain business activities. An overall growth cap has only been issued once before, when the Federal Reserve issued an asset cap on Wells Fargo in 2018. 

Even so, growth caps are an established tool in regulators’ toolkits to rein in problem banks. Clifford Stanford, a regulator lawyer with Alston & Bird, said the OCC made it clear in its 2023 policies and procedures manual on enforcement actions that growth caps could be used as a remedy for a host of issues.

“The use of the asset cap in this instance seems reflective of the seriousness of the concerns in the OCC’s enforcement order and may be best understood in the context of larger institutions, for which growth caps seem calibrated to serve to focus boards and management on resolving issues for so long as the caps remain in place,” Stanford said.

The cap will be in place until the OCC determines the firm has addressed its anti-money laundering deficiencies. But if the Wells asset cap is an accurate indicator, the cap is unlikely to be a short-term arrangement, said Todd Baker, managing principal at Broadmoor Consulting and a senior fellow at Columbia University.

The Fed capped Wells Fargo’s growth after an unauthorized account scandal at the San Francisco bank revealed deep-seated cultural issues related to its cross-selling incentives program. The order has put Wells Fargo under a supervisory microscope, Baker said, leading to various other deficiencies being unearthed and thus extending the life of the cap.

“As we know from the Wells Fargo experience — and I think this is going to follow a lot of that pattern — it’s very difficult to get out of regulatory jail when you have this kind of pervasive oversight failure,” Baker said.

TD Bank’s asset cap differs from the Wells Fargo cap in several significant ways. For one, it is being imposed on two subsidiary banks separately, rather than the overall bank holding company. The TD restriction also includes a clause that would require it to shrink by up to 7% annually if it fails to comply with the order. 

But like the Wells Fargo action, TD’s asset cap does not come with a defined end date — a fact that some legal scholars worry gives regulators too much power over the banks they supervise without sufficient accountability. 

“I understand the desire for flexibility by the OCC, but I think of an asset cap as a particularly strong remedy, one that should not be deployed lightly,” Zaring said.

Zaring argued that it would be better to attach a sunset provision to such restrictions that allows them to be renewed if certain conditions are not met. He acknowledged that the open-ended nature of the penalty is an effective way to force banks to address key issues, but added that the effects reach beyond those most responsible for the malfeasance. 

“You’re not just hurting the bank, but also a bunch of people who didn’t have much to do with the misconduct to begin with,” he said. “That may be a price worth paying if the misconduct by the bank is sufficiently extreme, but I think it will always make the growth limitation sanctions a last resort.”