Have Bank Regulators Effectively Responded to the Financial Crisis?

In the wake of the Great Recession, regulators pledged to rectify the imbalances, loopholes, and inefficiencies that plagued the nation’s banking institutions. Now, years after regulators first embarked on a lengthy process of reform, many observers have asked whether financial regulators have crafted successful regulatory responses to the financial crisis? To answer this question, one agency has turned to its peers abroad for analysis and recommendations. The nation’s primary supervisor of national banks and thrifts—the Office of the Comptroller of the Currency (OCC)—has recently published a report prepared at its request by a committee of former and current financial regulators from Canada, Australia, and Singapore assessing its performance following the financial crisis. The independent international team specifically examined the agency’s oversight of large and midsized banks and thrifts. While the report endorsed several of the OCC’s recent actions, the committee also outlined a series of wide-reaching recommendations addressing ways in which the agency could supervise financial institutions more effectively. The committee recommended more sharply focusing of the agency’s mandate, further improving risk identification and reporting, decreasing the lag time between risk identification and successful risk mitigation, reallocating some OCC staff members, increasing effectiveness of bank rating systems, and potentially removing overseers from bank offices. The committee—led by former OCC Comptroller Jonathan Fiechter—based its recommendations on a series of interviews with OCC officials as well as other financial regulators across the world. Using this interview data—together with comparative analysis of OCC actions with the actions of other countries’ regulators—the team developed its recommendations. The committee first recommended a revision of the OCC’s mandate that would clarify that ensuring the safety and soundness of financial institutions is the agency’s primary goal. In evaluating the range of strategic goals to which the agency has committed in recent years, the committee expressed concern that “[t]here is a material degree of uncertainty as to the priority of outcomes the OCC is seeking.” A rearticulation of the agency’s mission naming the preservation of safe and stable financial institutions as its primary objective would lend clarity and efficiency to the OCC’s supervisory role. The report also outlined several key changes that could make the agency more nimble and effective in its responses to emerging risks. According to the committee, agency responses to new risk data are often unduly delayed by attempts to coordinate OCC actions with other financial regulators, such as those in the Federal Deposit Insurance Corporation and the Federal Reserve. In seeking to respond to developing problems, Fiechter suggested that the OCC must determine “which is more important: dealing with the immediate problem on the ground or trying to ensure that there is a consistent interagency approach?” In addition to taking steps to ensure that interagency cooperation does not bog down risk mitigation measures, the report also suggested that the OCC consider revamping its metrics for identifying risks within financial institutions. While the two existing systems—CAMELS and the Risk Assessment System—are helpful, the report encouraged the OCC to “make examination ratings more forward-looking” in order to curb emerging risks in banks more effectively. The report also called for a major shift in OCC staffing protocol. While the OCC has maintained the practice of stationing its examiners within banks worldwide for decades, the committee has encouraged the OCC to abandon this practice. Instead, the report recommends the creation of “shared OCC offices in the field,” where examiners supervising various financial institutions work together at a central location. The committee believed that such an overhaul of the examiner system would facilitate information sharing between OCC officials, resulting in better standardization of risk-management practices across the banking industry. Overall, the committee has emphatically commended the OCC on its proposed efforts and the effectiveness of its staff, calling OCC officials “highly motivated, experienced, and professional” in carrying out the agency’s important mission. Comptroller Thomas Curry has pledged to “take advantage of these recommendations to make a very strong agency stronger still,” although he notes that some of the suggestions would require a substantial allocation of agency resources. The committee has also conceded that some recommendations could be costly—for example, the repositioning of bank examiners could increase agency costs by requiring it to “open up new offices or spend more on travel.” After releasing the report earlier this month, the Comptroller vowed to initiate a comprehensive review of the committee’s recommendations. Following a preliminary review of the report, the agency agreed to announce “initial conclusions” within 60 days and to provide a complete “implementation plan” within four months.

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