OCC's Curry on Big Bank Breakup, Basel and Preemption

WASHINGTON — In his first nine months as comptroller of the currency, Thomas Curry has had to deal with a community bank revolt against Basel III, policy heavyweights calling to break up the big banks, and a mortgage servicing settlement that had gone expensively off track — to name just a few pressing issues.

He still faces some of those issues, as well as other challenges including when and how regulators will finish myriad rules required by Dodd-Frank and lingering questions over where the Office of the Comptroller of the Currency stands on preemption.

"Almost every day there is a surprise," Curry said. "It's nice to see how nimble you are when you get gray hairs."

In his first extensive sit-down interview with American Banker since taking office, Curry tackled many of these topics head-on, while sidestepping exactly where he stands of a few critical ones. He also confronted what many view as his biggest hurdle: convincing critics that the OCC is not too close to the banks it regulates.

Following is an edited Q&A.

Everyone from Richard Fisher to Robert Reich, Tom Hoenig and Sheila Bair has endorsed breaking up the big banks. Where do you stand on this?

THOMAS CURRY: That's a big policy issue, and there's a lot of debate about it. And I'm looking at what Congress gave me, which is the Dodd-Frank Act, and it's our job to implement that law. And I think the purpose of that is to address these systemic risk issues. The establishment of [the Financial Stability Oversight Council], the prudential supervision rules for SIFIs [systemically important financial institutions], all those core provisions, the resolution authority, the living-will process. All of those things are part of the current set of laws governing large institutions. I think our job at the OCC as the supervisor of the national banks, which are a big part of some of those domestic SIFIs, is to implement the law and make it work. Ultimately, it's Congress' job to see if we're successful or not.

Do you feel that Dodd-Frank did an adequate job addressing the "too big to fail" issue?

That's the playbook I was handed, and we're running with it. That's one of the things I want to see done quickly this year is to finish some of those pieces, in terms of the rule-writing and working on internally how we implement them in our examination programs and supervisory policy.

Do you think that the nation and economy benefits in some way from having such large banks?

I think that it's incumbent — and I've said that to some of the CEOs of the institutions that we supervise — that they've got to go out and make the case why the economy and the public good benefits from large, diversified universal type of banking institutions. I think that's the key thing that has to be done from an environmental standpoint.

At the end of the day, we have a framework to deal with the SIFI-type of institutions. We are going to try to make it work. If it doesn't, we will look to Congress to rethink the issue.

Small banks really feel overtaxed right now. Some of them feel there should be a two-tiered regulatory system, where there is one system for large banks and another for small banks. Do you have any sympathy for that point of view?

I understand that's a proposal that people have put out there. But I think it's more that we need as supervisors to actually be able to tailor the rules to the diversity of the institutions that we supervise. I think we are in a position to have that knowledge, because we are the day-to-day supervisor of them. So I think it's a little too easy to say small bank, large bank. I think you have to look at business plans.

I think this is really the role of the supervisor in the process and the exercise of judgment. It's basically how do you approach the regulation of banks? You need sound rules and you need metrics or analytics as well to monitor performance but you also need supervision which is people assessing the institution. To rely on any one of those three legs exclusively I think is a mistake. Some of the focus today is too much on the rules, too big or too little on supervision, and we probably don't use enough analytics in the way we approach the supervision of banks.

What is the OCC doing to get more analytical? That's one complaint I hear from bankers that say, "We see all these rules but we don't know how to interpret them."

There are a lot of things that we're looking at, some of the internal initiatives we've launched as an executive team here at the OCC. We also have a lot of data that we get and are we really using the data that we have? To answer your question, are we are stepping back and saying, ‘How effective are the rules and processes that we use and how do we measure their success?' Those are things we need to do more of, that we are working to establish the framework here at the OCC to have the ability to do that.

There is a widespread perception by some that the OCC is too close to the largest banks. Do you feel that's a fair perception and what, if anything, are you doing to combat it?

I've always viewed the role of the bank supervisor as being the cop on the beat. And you have to know the institutions that you supervise like you know your neighborhood and you have to be fair. You have to be reasonable. But you also have to have a good dose of healthy skepticism. And that's hard to do, and sometimes I think the agency has been successful and sometimes not so successful. But those are the guideposts that I set at the OCC going forward.

Are there any specific steps you've taken to address that concern?

You have to do it on a case-by-case basis, and I think we've been doing that in the last nine months as issues or situations arise. That's been the approach that I've emphasized to the management and examination teams here, and I think that's come through.

I've heard others say that this is the year where all or most of the major Dodd-Frank rules are finally going to be implemented. Do you agree with that assessment?

I do think so. I think it's important to nail down what's outstanding within the first half of this year. You need to have certainty. Institutions and individuals can't plan if they don't know what the rules of the road are and I think we need to provide that certainty, particularly on capital. That's a big issue, you can't plan if you don't know how much capital is going to be required or how it's going to be allocated. I'm very concerned with how the Dodd-Frank rules on mortgage lending will come together. That's a very important industry, all sectors of it. It's important to the economy. We need to get those pieces put together so that the industry can plan, the industry can lend and the economy can grow.

Obviously, the risk retention rules and QRM were being held up by the Consumer Financial Protection Bureau's qualified mortgage rules. Now that that's out, do you think we are going to see that soon?

That's the hope. Now we are going to get it in higher gear and get this in place. My hope would be by the second half of this year, we would have the rules in place. It's always dangerous to predict time frames, but that's a potentially doable target.

You mentioned capital. Were you surprised by the backlash that community banks had to Basel III?

No, I think we had some anticipation that would be the reaction. I think we have a good feel for bankers' sentiment and we have a very good feel for community bank sentiment. That's one of the things as comptroller that I want to reemphasize. We're a community bank supervisor; two-thirds of our resources are devoted to community bank supervision.

We pretty much knew where some of the comments were going to come from. We encouraged the numerous comment letters. We wanted to know how it affected individual institutions. That's why we had the calculator developed on an interagency basis as well.

Community banks have a fair number of concerns. Do you feel the final rule can address those concerns?  

I think we can and will. On the risk weightings, we talked a little bit earlier about how mortgage lending is important to all banks, but particularly community banks, and we need to have as many players as possible in that space. And we need to look at how those rules fit together and how it will affect the different sectors of the banking industry.

Do you think the community banks will be satisfied with what the regulators do?

Our goal is not to make them satisfied, but our goal is to take into account their legitimate concerns.

How quickly are regulators going to release the final rule, especially as the international Jan. 1 deadline has already passed?

I do think there's a consensus among the agencies that we need to come out with a final proposal soon and let people know where the rules are.

I want to ask you about preemption. How much do you think the Dodd-Frank Act changed preemption?

I think Dodd-Frank was important because it did address some of the underlying tensions about preemption. I'm talking state-federal. What was really important was the establishment of the CFPB and you do have basically a federal floor and consumer protection area.

Do you feel the law significantly changed how the OCC should view preemption? Before you were comptroller, the OCC came out with an interpretation that said not much had changed. The Treasury came out very publicly and forcefully said that was wrong. Who do you agree with: the OCC or the Treasury?

Well, two things. One, that's what courts are for when we have a disagreement. No. 2, this was a question at my confirmation hearing and I made it perfectly clear that the supremacy clause of the United States Constitution supersedes any conflicting state law. My job is to enforce the National Bank Act, and I'm going to do it according to the rule book, which is our statutes plus Dodd-Frank.

The foreclosure settlement. A lot of people feel the process for it was messed up. It started one way with banks required to do these huge look-backs. They got maybe a third of the way through, spent about $1.5 billion and then we had this other settlement that stopped all that. What did you learn from that process?

This was a huge undertaking that started with good faith. I think as the agency got into it deeper and saw the colossus and the complexity and the results that it was in the best interest of the effected parties, primarily the individuals that we were charged with finding out whether or not financial harm had occurred or not, were better off getting quicker resolution through the settlement.

Basically, the process was taking too long?

And the expense and the results. There really was a disconnect. It's also important in the larger context of we talked about of having certainty in the mortgage sector. This helps eliminate some of the uncertainty. And this potentially could have been a multimonth process on a going-forward basis. The best interest of everybody was to come up with a different solution, and that's why we started the ball rolling here at the OCC.

Are you confident that the numbers you guys arrived at are fair? I mean one of the big complaints is and you don't complete the process, it's unclear who is harmed and how badly.

With all settlements, you know, nobody wins completely. We think it's fair. We think we had a reasonable, factual or empirical basis for coming up with the numbers we came up with. A lot of that's a result of some of the review work that's been done already. And we think that the work that we did on the matrix provides a framework for trying to allocate those funds among the class of borrowers.

Are there lessons here for future cases?

Definitely. Part of this process is you want to make sure that this is wrapped up in a timely manner. But one of the to-do things afterward is to take a cold, hard look at how we approach this, the lessons learned idea — what's right, what's wrong. And going forward, what would we do differently or under what circumstances would we scope out something like this remedy?

Two things that I hear you talk often about are cautions on the loan-loss reserves and lowering that too quickly as credit quality is improving. Also, you've raised concerns about enterprise risk management. From a community bank perspective, that gets a little lost in translation. How do you want them to comply with that and what is the time frame?

It's important out of the last crisis that we go out and raise red flags, be more participatory. It will help the industry, hopefully, to avoid some pitfalls.

And the risk management focus, emphasizing that I think let's solve some of the problems before they become problems. Be aware of the environment, especially through any type of bank, small bank, new products. That's important to emphasize.

Specifically on the loan-loss reserving, obviously there's not a new requirement. But is there something more specific you can give banks so they understand what they really should be looking at? Because a lot of times, you hear credit quality has improved and earnings have improved so it's time to lower the reserve.

The underlying message is don't play with it. It's important that the allowance be adequate. Don't use it to spice up your earnings. The reality of the process is that's one of the major discussions of the exam is: what's your methodology, what went into it, how did you arrive at it, does it make sense in the context of the bank.

You've said the most serious risk at banks right now is operational risk, not credit risk. Are you concerned?

Yes, particularly at the large institutions. I think that's been borne out by the enforcement actions that we've been part of. It adds up. It has a high cost. Not necessarily all the times it could be avoided but if institutions were very sensitive to the operational risks, identified them and attempted to mitigate them, I think everybody would be in a better position. Again, that's the message of let's try to raise the red flags, emphasize points and eliminate some of the surprises.

Do you feel that bankers are listening to that? Do you feel the big banks get that?

Yes, we've had a pretty good reception to that. You've raised the issue, community banks want to be reassured what you're not saying we have to be supervised or follow exactly the same precepts that a large bank has to but these are core principles that do apply to institutions of all sizes. And we're very mindful that you've got to adapt to the situation that you're dealing with.

When you're talking about enterprise and operational risk management in various aspects — specifically for the smaller banks, where would you say they're really in need?

It's in the risk assessments reports. There's a lot of pressure out there to increase revenues, the margins being compressed. Don't go out and enter into a new product or diversify geographically without thinking it through. If I could distill one piece of advice, that's probably it. It's just the pressure to do something that you haven't really thought through.

Let's talk about the Volcker Rule. Like Basel III, a lot of commenters said the proposal put out was too complex. Is there a way to make it easier to implement?

A lot of the stuff was determined by the statute that you're trying to implement the regulations for. I mean, just the way the Volcker Rule is set up is kind of complicated. It's a ban, and then there's exclusions, and then there's permitted activity. So sometimes when you have a regulation, sometimes the complexity is driven by the underlying enabling statute. But our goal with any rulemaking is really we want to bring to the table our experience and practical knowledge about how the industry actually functions as a business to help craft rules that work and make sense.

A couple of weeks ago, you mentioned possible changes to Dodd-Frank. Are we now entering an era once we get all these rules out where we can start making changes and, if so, where is that likely to happen?

First off, I think we're probably in a good environment for purely technical changes to be identified and addressed. Part of the reasons for getting these rules done is you can see how they work. And as I mentioned before, a lot of this is driven by the statutes themselves. It's up to Congress to decide whether they work or not and make the changes.

But we need to move forward and get these rules in place. We don't want really bad rules, but if they're imperfect because of the underlying statute, we've got to get them out there. That will start the process of looking at it. I'm not saying any of these rules are imperfect.