The regulator in charge of some of the biggest banks in the United States needs to change the way it does business, says a panel of international experts, or it runs the risk of missing the next big crisis.
The Office of the Comptroller of the Currency, a division of the Treasury Department, is in charge of assuring the safety and soundness of all national banks and federally chartered savings and loan associations. For years, the agency has had a policy of installing teams of “resident examiners” in many of the largest banks in the country, including JPMorgan Chase, Bank of America and Citibank. Rather than appearing only for an annual examination, these supervisors are permanently on the premises of the banks they supervise.
A recent report, solicited by the agency itself, warns that this longstanding practice opens the agency up to the possibility that it will fail to recognize a systemic crisis before it becomes a danger to the economy and that some of the on-site examiners will “get stale and become too familiar with the mid-management of the institution.”
The team of experts brought in to review the OCC’s operations was made up of banking experts from around the world, including former regulators from Australia, Canada and Singapore. It was headed by Jonathan Fiechter, himself a former senior OCC official and one-time deputy director of the International Monetary Fund’s Monetary and Capital Markets Department.
The panel urged the agency to move its examination teams out of the banks they supervise to shared OCC offices in the field.
While keeping examiners in the banks they supervise “may facilitate good communications with the bank,” the panel found, “it has the undesirable effect of reducing communications among OCC examiners assigned to other banks.”
Centralizing the examinations teams, the panel suggested, would allow better “horizontal reviews” – meaning that the agency would have a better sense of trends across the banks they supervise, allowing regulators to spot potential problems before they become unmanageable.
Another benefit, the panel reported, is that moving examiners between banks more frequently would prevent both the appearance of “regulatory capture” – when rather than serving the public, regulators appear to serve the institutions they oversee – and the possibility that examiners isolated in a single bank could deem as acceptable practices that are actually unusual for the industry. “Examiners, lacking good comparators, may simply assume an institution’s controls are adequate,” the report said.
Whether the OCC will act on the recommendation in the report remains to be seen, but in a letter to Fiechter, Comptroller Thomas J. Curry wrote: “The financial crisis showed that there are weaknesses in the financial regulatory system, in the United States and in the rest of the world, and it is vital that all of us do everything possible to identify and address any flaws in the process that contributed to the crisis.”
Follow Rob Garver on Twitter: @rrgarver
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