Research AreasFinance, Jobs & MacroeconomicsSAFER Financial ReformFocal Points for Commission InquiriesFinancial Supervision and Regulation: the Other Federal Banking Agencies

Financial Supervision and Regulation: the Other Federal Banking Agencies

Tom Schlesinger, FCIC Watch Coordinator

L to R: Office of Thrift Supervision Director James Gilleran, James McLaughlin of the American Bankers Association, Harry Doherty of America's Community Bankers, FDIC Vice Chairman John Reich and Ken Guenther of the Independent Community Bankers of America.

Long before the financial crisis escalated, federal banking and securities regulators were criticized for lax enforcement, particularly with respect to fulfilling their consumer and investor protection obligations. In the banking sector, observers reiterated longstanding concerns that both the Office of Thrift Supervision (OTS) and Office of the Comptroller of the Currency (OCC) acted permissively, in part to encourage forum-shopping by regulated firms, which they regarded as their “customers.” In addition, the agencies aggressively (and effectively) sought to preempt state-level actions that enhanced consumer safeguards against abusive lending practices.

Although these patterns have been amply chronicled in congressional inquiries, journalistic accounts and independent studies, the Angelides Commission could make an important contribution to public understanding of the crisis by compiling a comprehensive account of depository-institution regulatory and supervisory activities by OCC, OTS, the FDIC and the NCUA. Such an account should be based upon a thorough inspection of internal agency records and supplemented by interviews with agency personnel. It should focus on three areas of inquiry: a) agency neglect or underestimation of developing problems in the banking sector; b) agency efforts to thwart or weaken new state and federal measures to strengthen regulation; and c) agency actions designed to roll back existing federal oversight of the banking industry.

  • What factors accounted for the vast disparity between the large number of consumer complaints recorded by the banking agencies between 2000 and 2008 and the tiny number of enforcement activities initiated during this period?
  • Judging by agency records and interviews of relevant supervisory personnel, how adequate were internal risk management mechanisms at regulated institutions in the period leading up to the crisis? At large institutions that experienced problems during the crisis? What were the agencies’ primary tools and techniques for examining those risk-management mechanisms and how effective did those tools and techniques prove to be?
  • What do agency records and interviews with relevant officials reveal about internal agency discussions that took place regarding efforts to press federal preemption of state-level attempts to combat abusive lending practices? What do agency records and interviews reveal about the timing, strategy and objectives of such efforts?
  • What do agency records and interviews with relevant officials reveal about the agencies’ monitoring of congressional activity regarding financial-market regulation from 2000 to 2008? To what extent did the agencies interact with members of Congress, their staff, and representatives of regulated firms and other interest groups regarding legislative proposals to establish, enhance or loosen oversight in areas such as structured products, private capital pools and mortgage origination and brokering? What was the nature of those interactions?
  • During the period 2000-2008 exactly how many resources – expressed in staff time and expenditures – did the agencies devote to regulatory reviews designed to produce “relief” for regulated institutions? What do agency records and interviews reveal about how these reviews were planned, organized and implemented? How did the reviews impact the agencies’ perceptions and performance of their supervisory responsibilities, specifically their willingness to introduce new rules, examination procedures or other safeguards responsive to changing S&R needs?

Internal Regulatory Reviews

One key element of the legal and regulatory structure governing financial activity in the U.S. is a review process that presumptively favors the removal, weakening or permissive application of rules intended to safeguard consumers, investors and the public interest. The institutionalization of this process emerged during the late 1970s when President Carter responded to mounting complaints about excessive regulation by appointing a Regulatory Analysis Review Group to suggest ways to cut regulatory costs and by issuing an executive order that required all executive branch agencies to conduct cost analyses of future rules. In 1979, the Federal Reserve’s Board of Governors issued a statement of policy that required the central bank to review each of its regulations “at least once every five years with a view towards eliminating, simplifying or otherwise easing the burden of each regulation.”

Similar review mechanisms became more commonplace in the aftermath of crises that battered the deposit-taking industry during the 1980s and early 1990s. For example, the Riegle Community Development and Regulatory Improvement Act of 1994, which included more than four dozen measures designed to ease examination requirements, also contained (in Section 303) a review provision that facilitated the abolition or alteration of numerous banking regulations. The Regulatory Flexibility Act – included in the Paperwork Reduction Act of 1995 – required federal banking agencies to “examine each rulemaking to minimize the burdens it might impose on the industry and consider various alternatives.” And in 1996, Congress passed the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA), which amended TILA and RESPA to “streamline” mortgage lending and directed the agencies (pdf) to retroactively review regulations and eliminate rules deemed burdensome.

Operating within the ten-year time frame established by EGRPRA, federal agencies began their review of banking regulations in 2003. Led by OTS chief John Reich, the agencies held numerous meetings for industry around the country but only a handful for consumer and community interests. The EGRPRA website included a “Top Ten Issues” page that compiled banker grievances about HMDA, CRA, TILA’s right of rescission, privacy notices and disclosure notices under TILA and RESPA. The website contained no comparable page describing consumer concerns. The review eventually produced a series of recommendations that led to “relief” legislation passed by Congress and signed by President Bush in 2006.

Over the past three decades, all these review processes have shared several distinguishing characteristics. Each posited regulation as onerous and established a statutory or administrative framework for eliminating “burdens.” Each appeared to systematically overlook the efficiencies (e.g. forgone bailout costs) associated with effective financial-industry oversight and each lacked mechanisms to recognize or remediate regulatory gaps and shortcomings. Each provided industry another forum (in addition to existing venues like litigation and rulemaking) for challenging rules it disliked and placed advocates of consumer and investor protection in a defensive position. And each took place in a setting far removed from the scrutiny or involvement of the public that regulations were designed to safeguard in the first place.

Witness List:

Office of the Comptroller of the Currency: John Dugan, Julie Williams, Jerry Hawke, Timothy Long, Douglas Roeder, Ann Jaedicke
Office of Thrift Supervision: John Bowman, John Reich, James Gilleran, Thomas Barnes
Federal Deposit Insurance Corporation: Sheila Bair, Sandra Thompson, Donald Powell, Martin Gruenberg
National Credit Union Administration: Debbie Matz, Melinda Love, JoAnn Johnson

Binyamin Appelbaum and Ellen Nakashima, “Banking Regulator Played Advocate Over Enforcer,” Washington Post, November 22, 2008

“Neglect and Inaction: An Analysis of Federal Banking Regulators’ Failure to Enforce Consumer Protections,” Center for Responsible Lending, July 13, 2009 (pdf)

Testimony of Professor Patricia A. McCoy to the Senate Banking Committee, “Consumer Protections in Financial Services: Past Problems, Future Solutions,” March 3, 2009

Government Accountability Office, “SEC: Greater Attention is Needed to Enhance Communication and Utilization of Resources in the Division of Enforcement,” May 7, 2009 (pdf)