Bank failure is a critical concern for international bank creditors, particularly in jurisdictions with a history of banking instability. In recent years, Puerto Rico has witnessed several high-profile cases of bank failure and subsequent fines for wrongdoing. Puerto Rico’s banking system operates under a mix of federal and local laws. As an unincorporated territory of the United States, Puerto Rico’s banking sector is subject to US federal banking regulations, including those enforced by the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC). Local regulations are governed by the Office of the Commissioner of Financial Institutions of Puerto Rico (OCFI).

Several Puerto Rican banks have faced substantial penalties for wrongdoing, including Banco Popular de Puerto Rico, which was fined $25.5 million in 2017 for Bank Secrecy Act and anti-money laundering violations. Westernbank Puerto Rico and Doral Bank were two prominent banks in Puerto Rico that faced severe financial distress and were ultimately closed by regulators. The OCFI and the FDIC acted to protect the interests of depositors and minimize the potential impact on Puerto Rico’s financial system. By selling the banks’ assets and transferring their liabilities to healthier institutions, they facilitated an orderly resolution process and maintained the stability of the Puerto Rican banking sector.

Despite these penalties, these banks were not shut down due to the potential systemic risks and negative impacts on the local economy. Instead, regulators opted for fines and supervisory actions to ensure corrective measures were taken.

Bank Failure in Puerto Rico

Bank failure in Puerto Rico is defined as the inability of a bank to meet its obligations to its depositors, creditors, or counterparties, resulting in its insolvency or severe financial distress. Bank failure determination involves a comprehensive assessment by the bank supervisor (OCFI), which takes into account capital adequacy, asset quality, management effectiveness, earnings, and liquidity. If a bank fails to meet these criteria, the OCFI may conclude that the bank is at risk of failure.

The OCFI has the legal mandate to identify, monitor, and address any risks posed by banks operating in Puerto Rico. The OCFI’s role includes conducting regular examinations, enforcing compliance with regulations, and taking corrective actions when necessary. In the event of bank failure, the OCFI coordinates with the FDIC to implement resolution measures.

Common reasons for bank failure in Puerto Rico include poor management, high levels of non-performing loans, and inadequate capital buffers. After the conclusion of bank failure, the OCFI and FDIC work together to execute resolution measures, which may involve intervention, conservatorship, or receivership. The goal is to preserve the critical functions of the bank, minimize disruptions, and protect depositor interests.

The resolution authority in Puerto Rico, primarily the OCFI and FDIC, follows a multi-step process when a bank fails:

  • Assessment and determination of the bank’s financial condition
  • Implementation of early intervention measures if necessary
  • Appointment of a conservator or receiver
  • Execution of resolution strategies and tools

Several options are available in Puerto Rico for restructuring or dissolving a failed bank. These options im to facilitate an efficient resolution and minimize losses to depositors and creditors and include the sale of the business to a healthier institution; the establishment of a bridge bank to maintain critical functions temporarily; asset separation to isolate non-performing assets; and the recapitalization through equity or debt issuance.

Protection of Depositor and Creditor Interests

There is no bank deposit guarantee program operated by the government of Puerto Rico. As part of the Federal Reserve System of the United States, the financial industry is regulated, supervised, subject to the US Patriot Act, and required to maintain bank secrecy. By applying to the FDIC deposit insurance framework, financial institutions can opt to be subject to further US oversight, alongside the Office of the Commissioner of Financial Institutions of Puerto Rico.

Account deposits at Banco Popular de Puerto Rico, Banco Santander Puerto Rico, Firstbank Puerto Rico, Oriental Bank and Scotiabank de Puerto Rico are protected by the FDIC, which provides deposit insurance up to $250,000 per depositor. Other creditor interests, such as bonds and loans, are protected by law through priority ranking in the resolution process, with secured creditors typically receiving preferential treatment.

To ensure that non-viable firms exit the market in an orderly manner, the OCFI and FDIC collaborate to develop resolution plans and implement them in a way that minimizes disruptions to the financial system and economy. This approach allows for a controlled wind-down of the institution, facilitating the transfer of assets, liabilities, and operations to healthier entities, or the orderly liquidation of the failed bank.

Bank Liquidation Rules

In Puerto Rico, bank liquidation involves the appointment of a receiver, typically the FDIC, to manage the institution’s assets, liabilities, and operations. The receiver is responsible for maximizing the value of the failed bank’s assets, resolving its liabilities, and distributing any proceeds to creditors according to their priority rankings.

Account holders of a failed bank in Puerto Rico can take several steps to safeguard their position during statutory administration, deposit insurance, and bank liquidation:

  • Maintain accurate records of deposits, account balances, and transactions.
  • Keep personal information up to date with the bank to facilitate communication during the resolution process.
  • Monitor the financial health of the bank, and consider diversifying deposits across multiple institutions.
  • Stay informed about FDIC deposit insurance limits and coverage.
  • Respond promptly to any notifications or instructions from the OCFI, FDIC, or appointed receiver during the resolution process.