Q&A: The OCC’s Joseph Otting

As the 31st comptroller of the currency at the OCC, former banker Joseph Otting is tasked with ensuring the safety and soundness of the federal banking system. Here, he talks about regulatory challenges, the potential fintech banking charter and what he sees as the path forward for community banks.

In your view, what banking policies need revisiting?
Joseph Otting: There are three policy areas that need work in the near term. First, the Bank Secrecy Act (BSA). The laws and regulations around the BSA and anti-money laundering are intended to protect our financial system from being misused for illegal purposes. But rather than serving that goal, our system has evolved into a series of “gotchas” and other unhelpful activities. We need a fresh approach. The OCC is just one agency in the mix. It acts like an umpire in baseball, but the rules are written by other agencies. To fix the system, we will need a collective effort that involves lawmakers, the Treasury Department, the Financial Crimes Enforcement Network (FinCEN) and other regulators. Congress has begun to reexamine the BSA to determine what can be improved, and I am optimistic that we can make the system work better and improve how we protect our financial system.

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Second, we need to reexamine the Community Reinvestment Act (CRA). The original intent of CRA was to encourage banks to lend in their communities. I am a big supporter of this goal and the community groups that provide services in their communities. But today we have an incredibly complex process that has lost its way. OCC ratings and decisions related to CRA need to be based on the actual record of how a bank meets its CRA obligations and serves the needs of its communities. We won’t tolerate groups that do not provide services to these communities to disrupt the process and affect our decisions. Banks will have the independence to determine what groups and activities they choose to partner with and invest in, and we encourage banks to ensure those investments make a difference in the communities they serve.

The third area is small-dollar lending. The byproduct of current regulation is that it’s very difficult to get a small-dollar loan at a bank, and most of this activity has been forced out of banking. My goal is to bring small-dollar loans back to banks. Banks should be part of the solution and one choice for consumers who have small-dollar, short-term credit needs.

What do you see as the major challenges for banking in the months ahead?
Otting: The federal banking system is safe and sound today. The industry understands its risks better than ever, and bankers have done a great job of taking on higher-quality lending. Capital and liquidity are good.

When we talk about challenges, credit quality is always a driver, and we are seeing a pattern of weaker underwriting and additional risk accumulating at this point in the cycle. The worst loans are made in the best of times. We also have to look closely at cybersecurity, which is front of mind for bank executives and regulators. We’ve made a lot of progress in this area, but I see an opportunity to better harmonize regulatory effort and guidance. We also need to watch the effect of rising interest rates on the balance sheets of these institutions after such a long period of historically low interest rates.

What do you see as the path forward for community banking?
Otting: Small, local banks remain the heart of their communities, and we need to ensure that they remain part of the broader banking landscape in the future. To do this, we need greater flexibility to tailor regulatory requirements for community banks that do not pose the same risks as their larger counterparts.

One way to move forward is to return to a simpler capital structure for small banks. I’ve been a banker for more than 30 years, and I need expert help to fully understand the requirements from time to time. We should not put that kind of burden on smaller banks that do not pose a threat to our financial system.

What are your thoughts on granting a charter to fintech companies?
Otting: I have not yet decided whether the OCC will use its authority to issue special-purpose national bank charters to non-depository fintech companies engaged in the business of banking. That is something I need to study more closely. There are still a lot of questions that need to be answered before moving ahead.

The best innovation that occurs outside of the banking system always finds its way into the system through purchase, partnership or imitation. Fintech companies have done a lot to change how banking services are delivered, and there will continue to be a place for them in the overall system, whether some of them decide to become banks or not. Consider marketplace lenders. Many of them are serving a different population than mainstream banks by accepting greater risk and underwriting loans that banks may not be willing to originate. The market can support both, give consumers more choice and expand inclusion.

Joseph Otting

Education: B.A. in management from the University of Northern Iowa; a graduate of the School of Credit and Financial Management, held at Dartmouth College.
Past bank employers: CIT Bank, OneWest Bank N.A, U.S. Bancorp, Union Bank of California and Bank of America
Past community development employers: California Chamber of Commerce, the Oregon Business Council and the Minnesota Chamber of Commerce
Board positions: OneWest Bank N.A. and U.S. Bancorp, among others