A lot had changed in the decade since the Office of the Comptroller of the Currency last overhauled its supervision of small and midsize banks, according to agency executive Sydney Menefee.
Fintechs exploded onto the scene, taking market share from traditional banks, partnering with community institutions or — in the case of companies such as SoFi and Varo — obtaining bank charters.
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The move will allow specialists “more of a bird’s-eye view” of new developments in financial services and promote consistent treatment across the agency’s regions of national banks that partner with fintechs or have cutting-edge business models, said Menefee, the senior deputy comptroller for midsize and community bank supervision.
“The industry has evolved, and we have to evolve, too,” she said.
The focus on fintech partnerships and novel banking models should reduce any differences among those kinds of businesses in supervisory practices among various regions, said Scott Pearson, a partner at Manatt, Phelps & Phillips, LLP and leader of the firm’s consumer financial services practice.
That’s been a particular concern for fintechs that partner with banks or institutions wanting to pursue a novel banking business model, where the business model might be more important than the location of the business, Pearson said.
“There’s some benefit one would think to having some people at the OCC dedicated to focusing on those technologies and making sure that they’re treated the same regardless of where the bank happens to be located,” he said. “Historically the OCC and other banking agencies have had sort of a regional approach where there could be some differences in supervision practices based on where a bank is located.”
Sometimes local examiners could lack expertise in these businesses, and realigning those portfolios could help enforce some consistency, Pearson added.
“Frankly, individual regulators who are conducting an examination have discretion on a number of different things,” he said.
Karen Solomon, senior of counsel at the law firm Covington and former acting senior deputy comptroller and chief counsel at the OCC, said that the agency’s change is consistent with a broader trend toward specialization at the agency. She said that a specialized deputy comptroller could help communicate between senior leadership at the agency and the examiners who deal directly with banks.
“Centralization of a particular type of supervision improves efficiency by making it easier to deploy resources where they are most needed and, at the same time, avoid duplication of effort,” she said. “Centralization also fosters consistency in the supervision of institutions or companies with similar business models.”
The change could signal an increased focus on technology service providers to banks, which could range from anyone providing cloud services to lending partnerships, said Chris Odinet, a professor at the University of Iowa College of Law, where he teaches consumer finance law. Bank regulators have a wider ability to oversee these institutions than they’ve exercised in the past, he said.
“OCC is taking the approach that the nature of these links between regulated banks and the technology companies that they partner with is just becoming much more of a partnership and less of a firm and contractor,” he said. “Regulators like the OCC have always had the power to supervise these sorts of firms, but the increasingly robust role they’re playing in the business models and activities of banks is being reflected in this reorganization.”
With a keener eye toward these kinds of partnerships, the agency could exert greater influence in the tech industry, he said.
“If the OCC didn’t like the way a certain nonbank firm is partnering with a regulated bank, and the OCC says that from now on all OCC-chartered institutions are prohibited from partnering with this firm because we’ve found problems with the relationships that poses a safety-and-soundness risk, or a consumer protection risk, then the OCC can really shut down one of these tech firm businesses if they really rely on doing businesses with banks,” Odinet said.
Overall, the OCC’s reorganization, which also includes an internal revamp of community and midsize bank supervision shouldn’t have an outsize impact on the traditional banks the agency supervises, Menefee said.
“Very few local institutions should see a change,” she said.
Instead, the larger piece — the centralization of novel and fintech provider portfolios — is designed to set the agency up to evolve alongside the industry in the future.
“We know what’s novel today might be commonplace tomorrow,” she said. “This portfolio is not static; it’s designed to be flexible.”
