Examiners-in-Residence Should Be Pulled Out of Megabanks: OCC Report

WASHINGTON — A team of international regulators delivered a sweeping report on Thursday calling for significant changes to the Office of the Comptroller of the Currency's supervision process, including pulling examiners-in-residence out of the biggest banks and making changes to the bank rating system.

The report, which was done at the behest of Comptroller Tom Curry, said the agency should relocate examiners who work on-site at large banks — particularly those who have been there for more than 5 years — to a centralized area where they can work with other large bank examiners. At issue are concerns that on-site examiners may be less likely to detect systemic problems across banks or get too close to their bank's management team, ignoring signs that the institution is engaging in unsafe behavior. Pulling them out of the bank would help curb that problem, the study's author said.

"This avoids the supervisors becoming too isolated in their assigned banks and promotes greater consistency in supervisory treatment and supervisory approaches across banks," said Jonathan Fiechter, a former OCC and IMF official tasked with conducting the report along with regulators from Australia, Canada and Singapore. "Bringing the supervisors together in shared space also provides a form for supervisors to compare practices in different banks. Bankers appreciate having examination staff that are familiar with what other banks are doing and supervisors who can provide guidance on better or best practices."

While it is unclear whether the OCC will take such a step, the agency has long battled the perception that it is too close to the institutions it oversees, particularly the largest national banks such as Citigroup, Bank of America and JPMorgan Chase. The examiner-in-residence program, initially launched in the 1990s, was intended as a way for regulators to keep a close eye on bank management and ensure ongoing oversight of institutions. Instead, however, it has often been seen as leading to regulatory capture, stoking fears that examiners lack the necessary objectivity to properly supervise a bank.

Asked whether the OCC is likely to adopt the report's recommendation, Fiechter acknowledged it would be difficult "because you have some areas of the country where you have a bank and not many other national banks are located there."

"So the cost of this policy is then you have to have people flying into the bank on a regular basis," he said. "It will be something that's difficult to implement but my sense from the reaction here is that everyone is supportive of at least of the objective of bringing the examiners together more frequently."

Overall, the report said the OCC needed to set a clear primary objective for its examiners to focus more on safety and soundness. While that has been the traditional goal of the OCC, the report suggested it was not being communicated adequately to examiners in the field who might favor "other goals," like fostering increased competition in certain areas.

Like in other countries, "supervisors with multiple mandates often of equal weight sometimes unintentionally compromise safety and soundness in favor of other goals," said Fiechter. "The idea is really to have a culture of safety and soundness being uppermost in the examiners' minds."

In response to such concerns, the report suggests the OCC develop a "risk appetite statement" so staff know exactly what the OCC wants examiners and banks to watch for within risks. The reporting team acknowledged that Curry had already made risk management a top priority and the OCC has a separate system for assessing banks on risk, called RAS.

But Fiechter said that the OCC's risk method should be implemented within the Camels ratings system that all prudential regulators use when evaluating banks.

The Camels system was "adopted by many other countries around the world but many of these other countries have substantively revised their risk assessment systems to be more forward looking," Fiechter said, who previously led the financial supervision and crisis management group within the International Monetary Fund's department of monetary and capital markets. "This has not yet occurred in the U.S. with respect to the Camels system. Frankly, one of the challenges in the U.S. is that multiple agencies need to agree to any change."

Curry said in a press release following the report that he was largely pleased with the results and would likely implement some of the recommendations quickly.

"We have not had time to conduct a thorough analysis of the report, but I can tell you from my initial review that it is a thoughtful document with a number of important recommendations that we can use to position the OCC to meet the challenges of the future," he said.

Curry has already been working on a number of the initiatives in trying to improve internal communication and focus at the agency since he was confirmed last year. He invited the foreign bank regulators into the OCC this fall, in what many outsiders saw as a rare move for a prudential bank regulator.

From Oct. 28 to Nov. 5, the independent regulators were given full reign to interview OCC senior staff and talked with a sister agency as well as board members and management at two large banks, the report said. But part of their assessment on the OCC bled into concerns about all of the banking regulatory agencies as the study concluded that each agency needed "a well-defined mandate and clear priorities" on supervision since they all have complex and overlapping responsibilities.

"While there is a common view that increased collaboration among agencies is important, this objective has apparently led to delays in the issuance of policies," the study stated. "There must be effective information sharing among the agencies to prevent duplication of efforts and avoid inconsistent messages being conveyed to the institutions . . . good coordination both at the examination level, as well as at the policy level, is essential to avoid imposing an unnecessary burden on institutions."

In a letter responding back to Fiechter after the study was revealed internally Wednesday, Curry acknowledged that timeliness was key and he promised to ramp up their efforts on some of the suggestions that can be made quickly.

"I believe that some of the proposals can be implemented fairly quickly. Others, however, will take more time, and I plan to put together a number of internal cross-functional teams to review these recommendations and decide how best to implement them," he said in the letter issued Thursday. "It is my goal to have the implementation plans in place within 120 days."

However, other recommendations such as relocating field examiners and collaborating on multi-agency policies are difficult and will take longer --if agreements can be made across agencies. For now, Curry said he would share the report with his counterparts at the Federal Reserve, the Federal Deposit Insurance Corporation and the Conference of State Bank Supervisors.

"While there is much that each of us can do on our own, there is no substitute for the kind of independent assessment that can be obtained from an outside group of international regulators with diverse backgrounds and broad professional experience," he said.

It is extremely important that financial regulators around the world continue to support each other to make the international process as strong as possible, and we at the OCC stand ready to do our share by participating in peer review processes for other countries."