It isn't often that a prominent regulator talks publicly about the dangers of regulatory capture, the phenomenon in which government agencies become advocates for the industries they're supposed to be overseeing. U.S. Comptroller of the Currency Thomas Curry did so yesterday in Chicago in a speech to a conference of state bank regulators:
Regulatory capture is a real threat to our agencies and the banking system we oversee. As regulators, we need to take great care to avoid doing anything that even creates that perception. We have seen examples of banking and deposit insurance agencies that suffered significant reputational damage, and in some cases were ultimately abolished, because the public saw them as serving their private, rather than public, interests. We should never employ our chartering authority to compete for “market share.”
One agency that was abolished was the Office of Thrift Supervision, which notoriously let IndyMac Bancorp Inc. backdate a capital contribution in 2008 so that it would seem healthier than it was. IndyMac failed two months later, costing the Federal Deposit Insurance Corp. almost $11 billion.
The Office of the Comptroller of the Currency also has received plenty of criticism for being generous to the large banks it oversees, including JPMorgan Chase & Co., where its examiners were slow to respond to the London Whale trading debacle two years ago. Curry, who used to be the state banking commissioner in Massachusetts, didn't dwell so much on his own agency's difficulties, though. His audience was state regulators. And on the subject of regulatory capture and agencies competing for market share, mostly he was speaking about them. He also expressed concern that too many state banking departments don't have enough staff or money to do their jobs properly:
To be clear, I welcome competition -- but not if the goal is nothing more than the accumulation of charters based on laxity in supervision or pricing differences. The dual banking system at its best reflects a much healthier kind of competition. It is a race whose prize is the value each of us adds to a healthy, safe and sound banking system through credible and effective supervision. As reaffirmed by the financial crisis and recent operational risk lapses, safety and soundness and consumer protection go hand in hand. A banking system that promotes or implies a lighter touch on either safety and soundness or consumer protection matters is not sustainable. So, if we are going to compete, we should do so on the basis of who is best at identifying weaknesses early, when they can be most easily cured, and who can provide the kind of expertise and support that enhances bank and system resilience.
Another backstory here: One of the worst examples of what he was talking about happened at Colonial Bank, based in Montgomery, Alabama. It had about $25 billion of assets when it failed in 2009. Its collapse cost the FDIC's insurance fund about $3.8 billion. Colonial, which had a long record of regulatory infractions, switched regulators (read: went shopping for regulatory leniency) three times from 1997 to 2008. The last time was in June 2008, just 14 months before it failed, when it became a state-chartered institution after almost five years of oversight by the OCC. Here's how Floyd Norris of the New York Times described the situation in a blog post after Colonial folded:
The founder and longtime chief executive of Colonial, Robert Lowder, last year explained that he was switching regulators -- from a federal charter to an Alabama one -- because regulators needed to “balance” his bank’s “safety and soundness” against the need for innovation. If ever there was a red flag, that should have been it. Instead, the Alabama banking department put out a statement about how happy it was to have Colonial under its supervision.
Curry deserves credit for trying to set the right tone at the top. It certainly would be a challenge to reform the regulatory culture for banks. He might have an easier time trying to get children to stop eating candy.
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