We ask Joseph Otting, comptroller of the Office of the Comptroller of the Currency, for his views on the national bank charter, bank consolidation and whether the big banks are too big.
Q: How have your 15 months as comptroller reshaped your perspectives on the OCC, the financial services sector and community banks?
A: As a former banker and now as a regulator, I have firsthand experience with the high quality of supervision provided by the OCC. It was of the highest quality while I was a banker and remains so today. My tenure at the OCC has reinforced my belief that community banks are a critical foundation of our banking system and play a vital role across the nation, creating jobs and economic opportunity. Until you have been part of the OCC, you cannot truly appreciate the resources and expertise that the agency commits to providing quality supervision to America’s community banks. Nearly 80 percent of the banks and savings associations supervised by the OCC are community banks with less than $1 billion in assets.
Q: What would you say to a community banker thinking about selling their bank due to excessive regulatory burden and unfair competition?
A: I’d say it’s a great time to be a banker. As comptroller, I have made it a priority to eliminate unnecessary regulatory burden so that banks can be engines of economic opportunity. As a banker for more than 30 years, I understand the burdens bankers face, and how to achieve quality supervision that ensures a safe, sound, fair banking system that meets the needs of consumers and businesses across the country. In 2018, we made good progress toward rationalizing banking rules and regulation. The Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2155), enacted in May 2018, made common sense, bipartisan reforms that the banking agencies acted quickly to implement. The list of where we made progress is lengthy: fewer banks under the Volcker Rule, increased use of short-form call reports, less frequent examinations for the healthiest community banks and a simpler capital regime.
In 2019, we’ll complete our work implementing the Economic Growth Act and continue to work on modernizing Community Reinvestment Act (CRA) regulations. We’ll also work to make compliance with Bank Secrecy Act and anti-money laundering (BSA/AML) rules more efficient and effective.
Q: Are there any initiatives under way to ensure that the national bank charter remains relevant and attractive for community banks?
A: As a banker, my preference was always to operate under a federal charter and to be supervised by the OCC. It made good business sense, because it allowed our bank to compete and operate nationwide under one primary regulator and one uniform set of rules and regulations as a result of federal law. The men and women of the OCC provided quality supervision, spotted issues early and worked with management to resolve concerns before they became problems. When they had to, they held management’s feet to the fire and always maintained open communication. That kind of supervision is priceless.
The OCC continually looks at ways to improve its supervision and the value of being part of the federal banking system. One way we did that in 2018 was to focus internally on how we operated to ensure we spent every dollar in bank assessments wisely. We eliminated nearly $100 million in costs in 2018, and as a result, announced the first reduction in annual bank assessments in a very long time.
I also support the dual banking system. The decision to operate under a federal or state charter is a bank’s business decision, and the freedom to choose what model works best provides strength and diversity to our nation’s economy.
Q: What is your view on consolidation in the banking industry?
A: Consolidation is a three-decade trend that appears likely to continue. As comptroller, I am focused on ensuring that federal banks and thrifts operate in a safe, sound and fair manner, and have the regulatory framework that allows them to compete and adapt to meet the financial needs of their communities.
I am encouraged to see a resurgence in de novos. Renewed interest is driven by economic conditions, banks’ abilities to reach new customers, valuations and regulatory reform. We are committed to making sure the de novo process is predictable and timely. Again, it’s a good time to be a banker.
Q: Are the large national banks becoming too big to fail or to regulate?
A: The nation needs a diverse banking system, and that includes having smaller local banks that understand their neighbors’ needs intimately and large multinational banks capable of supporting the nation’s industrial needs on a global scale.
The OCC has a great deal of experience supervising banks of all sizes, including the nation’s largest, most internationally active banks. Over the past several years, the agency has enhanced how it supervises large banks and raised the bar for how large banks approach their risk. That has made a significant difference since the last crisis.
Other things have changed since the last crisis as well. Banks have the best risk management in my memory, capital and liquidity are approaching historically high levels, and there are greater controls around the riskiest activities for the largest banks. Today, we also have greater coordination through the Financial Stability Oversight Council, more resolution authority that provides orderly liquidation and more risk-sensitive oversight by federal regulators.
Q: What is the next step with regard to the OCC’s initiative to modernize the Community Reinvestment Act (CRA)?
A: Last fall, we received robust comments from stakeholders of all kinds as a result of the OCC’s Advanced Notice of Proposed Rulemaking. That’s information that we would not have had otherwise.
I have read the vast majority of the nearly 1,600 comments we’ve received, and it is still clear to me that stakeholders want change. There is a strong desire for CRA regulations to provide greater clarity around what counts and what doesn’t, to remove the subjectivity in evaluations and provide clearer objective measures, to give more timely assessments, and to adapt the concept of “community” to how banking is conducted today.
We can make CRA stronger and encourage more investment and services where they are needed most. The next step is for the agencies to work together to develop a proposed rule. I hope to see that proposal published in the first half of this year.
Q: When will the OCC issue a fintech charter? Will such a charter be subject to the same regulations as community banks are subject to?
A: The OCC is open for business and announced last July that it would accept applications for special-purpose national bank charters from non-depository fintech companies engaged in the business of banking. That decision provides parity with options already available to these companies at the state level.
Rest assured, the OCC will supervise these new banks like other similarly situated national banks. We have been clear that a national bank charter has tremendous value, and it comes with responsibilities and obligations. I think that came as a shock to some fintechs. When the conversation began a couple of years ago, there may have been 250 fintechs lined up. As they came to understand what it means to be a bank, many have considered other ways of partnering with banks and providing their services. There will still be some whose business models are a good fit for a national bank charter. The point is to provide additional choice and allow the federal banking system to adapt to the changing needs of the market and its customers, just as it has for 156 years.
Q: How is the OCC’s new Office of Innovation helping community banks with the challenges of innovation?
A: The Office of Innovation supports community banks by serving as a clearinghouse for information on regulatory policy, the supervisory process and expectations. It shares success stories, lessons learned and information that banks should consider when evaluating new products and services. Community bankers have direct access to OCC experts on a variety of matters related to innovation, new products and services, and emerging trends, during banker visits or during Office Hours and Listening Sessions.
Q: What initiatives are you pursuing to ensure the OCC operates as effectively and efficiently as possible? How will any changes benefit community banks?
A: The OCC takes its responsibility to be a good steward of its resources seriously. In 2018, we cut costs by nearly $100 million from what we originally planned. We did that through optimizing our real estate, finding savings in contracted services and operating more efficiently overall. We continued that discipline in 2019 by reducing our budget again.
As a result, we reduced the assessments we charge national banks and federal savings associations in 2019.
But it is not all about costs. The changes we are making allow us to be more responsive to the risks and needs of the industry. One of my goals was to empower employees, particularly examiners in the field, to act on their expert judgment and on-the-ground insight. You can see the results in the number of decisions that require my signature. Two years ago, more than 90 percent of agency decisions went all the way to the front office. Today, fewer than half need my signature. That means quicker decision-making and more efficient supervision. Everyone benefits from that.
Q: What challenges do you see for banking in the next year?
A: It is important that bankers remain vigilant regarding the risks accumulating within their portfolios and businesses. The latest Semiannual Risk Perspective from the OCC describes the greatest risks facing the federal banking system.
Credit quality remains strong for now, but the OCC and bankers should monitor the quality of new loans, the potential for lender complacency and embedded risks from eased underwriting. Bankers must also manage risks associated with rising rates that have the potential to erode the value of long-term fixed-rate assets and increased cost of deposits because of competitive pressure.
We also have concerns about operational and compliance risks related to the increasing speed and sophistication of cyber threats and concentration in third-party services, as well as banks’ ability to manage money-laundering risks and adapt successfully to amended consumer protection requirements.
Another item on the radar involves the increasing volume of credit handled by nonbanks. Banks need to understand how risks developing outside the banking system affect them. The industry needs to understand where they are taking credit risk and whether they have the necessary controls for such risk. Everyone also needs to be aware that by the time you see overheating, you may have already exceeded your intended risk tolerance. The machine often stops suddenly.