BANKING: Deal between US bank regulators and AIB/Allfirst follows investigation

The written agreement between US banking regulators and AIB/Allfirst, published yesterday, follows a three-month joint investigation by officials from the Federal Reserve Bank in Richmond and the Maryland Commissioner of Financial Regulation into the Rusnak trading scandal at Allfirst Bank in Baltimore, Maryland.

The investigation began after it was disclosed on February 6th that over a five-year period, Allfirst currency trader Mr John Rusnak ran up losses - later calculated at $691.2 million (€760 million) - in proprietary trading, or gambling on currency movements.

Proprietary trading was immediately suspended at Allfirst and six Allfirst officials were fired after an internal report by Mr Eugene Ludwig, a former US comptroller of the currency, on March 12th. The report cited failure in controls, incompetence and laziness at Allfirst treasury operation.

Yesterday's agreement sets out a timetable for action taken on the basis of Ludwig report and further reviews by consultants hired by AIB. Further reviews are being conducted by Mr John Heimann, a former chairman of Merrill Lynch Global Financial Institutions and also a former US comptroller of the currency, appointed by AIB last month as special consultant on risk management and corporate governance, and by First Manhattan, one of the world's leading financial consultancy groups which is working with AIB's capital markets division.

The agreement stipulates that, within 10 days, AIB must submit to the Federal Reserve Bank in Richmond and the Maryland Commissioner of Financial Regulation, a written account of the immediate actions being taken to address the findings of the Ludwig report, and the findings of an examination of "management oversight, day-to-day risk management, internal controls, and audit functions and activities relating to the bank's trading loss" undertaken by the banking regulators.

Within 10 days AIB must provide copies to the banking regulators of its engagement letters with the consultants to show they have been retained to conduct a "comprehensive and timely review" of Allfirst operations so that the bank in future will conduct its activities in a "safe and sound" manner.

The review must address management structure and oversight, including assessments of the competence of senior officials, and of risk management, internal controls, internal audit function and treasury operations at Allfirst and AIB insofar as it conducts operations in the United States.

If the banking regulators require changes in the consultants' terms, AIB should make them within 10 days, and the consultants' reports must be provided to the banking regulators at the same time as they are provided to AIB.

Within 60 days of the receipt of the last consultants' report, the AIB "US Group" must submit a written management plan to the banking regulators describing specific actions that the boards of directors propose to take to strengthen management and to improve the boards of directors' oversight. The management plan must include detailed descriptions of the responsibilities of each affected senior officer of Allfirst.Within 180 days, the boards of directors of the Allfirst and AIB must each review its management's adherence to risk management policies and procedures and prepare written findings and conclusions of this review along with written descriptions of any management and operational changes made as a result.

Within 60 days of the last consultants' report, AIB "US Group" must submit to the banking regulators acceptable policies and procedures designed to enhance risk management, internal controls and management information systems at the two banks.

Mr Rusnak was able to made several fraudulent trades because of the failure of the treasury "back office" to confirm his trades with other banks - standard procedure in currency trading operations - many through prime brokerage accounts with Bank of America and Citibank.

Also within 60 days of the last consultants' report, the "US Group" should submit an "acceptable enhanced written internal audit programme" for Allfirst and the US operations of AIB. This should identify high risk areas and ensure that ongoing internal audits of critical or high-risk areas are performed with reasonable frequency and depth.

The agreement concludes with the stipulation that the "US Group" submits the new policies and procedures and programme required to the Federal Bank and Maryland regulators for review and approval within the time frames agreed.

AIB and Allfirst must adopt the approved reforms within 10 days of the banking regulators' approval and then "shall fully comply with them".

Finally the agreement states that within 30 days after each calendar quarter, the "US Group" should make a written report detailing the actions taken to comply with each provision of the agreement and reviewed by the directors.