Plan to Stop Banks From Seducing Regulators Dies Under Trump

A high-profile plan to prevent federal watchdogs from getting too cozy with banks they are supposed to police has been scrapped by President Donald Trump’s newest Wall Street regulator.

For years, the Office of the Comptroller of the Currency intended to remove hundreds of examiners who work inside the offices of JPMorgan Chase & Co., Citigroup Inc. and other lenders. In just his second week on the job, OCC chief Joseph Otting nixed the effort.

“Upon review, it is not practical to continue the agency’s efforts to move resident examiners out of on-site locations,” Otting, a former banker, said in a statement to Bloomberg News.

Other reforms, such as regularly rotating supervisors from bank to bank so they don’t spend too long in a particular firm, show the OCC has taken steps to prevent “regulatory capture,” said Otting, who ran OneWest Bank Group when Treasury Secretary Steven Mnuchin was the lender’s chairman. Factors cited as contributing to the OCC maintaining the status quo include the high cost of Manhattan real estate and the burden examiners would face in slogging back and forth between government offices and Wall Street banks.

The move is the latest example of how regulators under Trump are quietly rethinking Wall Street oversight even if they’ve made little progress so far easing rules passed in the wake of the 2008 financial crisis. Pulling embedded examiners out of big banks had been considered a key initiative to ensure supervisors didn’t develop a form of Stockholm Syndrome that kept them from aggressively looking out for abuses.

Beat Cops

The examiners employed by the OCC and the Federal Reserve Bank of New York are akin to cops walking the beat, because they are tasked with the crucial job of making sure banks follow the rules and don’t take undue risks. The agencies have special office space in each lender’s building, with their watchdogs largely quarantined from casual interactions with bankers.

At the OCC, the regulator of national banks, Otting is halting something that hasn’t happened yet. About 65 percent of its large-bank examination force remains on-site, the same as two years ago, according to the regulator. And the number of embedded supervisors has actually risen to 517 from 430 in 2015.

Otting said cost will continue to be a focus in the OCC’s handling of examiners.

“The agency will continue to review its locations and real estate strategy to ensure they support the agency’s mission in the most operationally and cost-effective manner possible,” he said.

Concerns that watchdogs might be too friendly with banks came to a head in 2012 when Carmen Segarra, a former senior examiner of Goldman Sachs Group Inc., claimed the New York Fed fired her for refusing to withdraw negative findings about the firm. While a lawsuit she filed was eventually dismissed, her complaints and recordings she’d made of Fed meetings triggered lawmaker demands for increased examiner independence.

The issue gained more attention in 2015 because of an embarrassing situation in which a Goldman Sachs banker pleaded guilty to accepting stolen documents from a friend who worked at the New York Fed.

Former Comptroller of the Currency Thomas Curry, a Barack Obama appointee, spearheaded the OCC’s effort to remove embedded supervisors. His plan focused on leaving a small number in place, while shifting the rest to regional teams that could focus on dangers that cut across multiple banks.

Fed Relocations

The New York Fed started a similar effort years ago to ship most of its roughly 200 in-house examiners to its downtown offices. So far, only a small number of people have moved, according to a person with knowledge of the process who asked not to be named because the agency hasn’t publicly laid out the details of its plan. The Fed still intends to relocate employees, the person said.

The OCC began reevaluating things under Keith Noreika, a former bank lawyer who ran the agency on an acting basis for several months this year. He thought it made sense to pull examiners out in smaller cities such as Pittsburgh, but not in New York, where office space is notoriously expensive.

“There seemed to a directive existing before I got here that they have to be moved out, whatever the cost,” Noreika, who plans to return to the private sector, said in an interview. “I just put a pause on that because I wanted us to continue effective supervision.”

Noreika said he doesn’t buy arguments that an on-site presence translates to regulatory capture, or a growing tendency to be sympathetic to industry viewpoints. He added that when he worked as an attorney for banks, his interactions with examiners were limited.

‘Sacred Space’

“My own experience with the OCC being on premises is it was entirely sacred space,” he said. “You weren’t allowed to eat lunch with them.”

But a confidential study commissioned by the New York Fed in 2009 that was later made public paints a different picture. The report said in-house examiners relied on good relationships with bankers to do their jobs and often believed “that a non-confrontational style will enhance that process.” It also noted an “excessive deference” to lenders and a reluctance “to press changes on the supervised banks.”
Source: Bloomberg

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