WASHINGTON — Under the Trump administration, the Office of the Comptroller of the Currency at times butted heads with other regulators over issues like reforming the Community Reinvestment Act and offering bank charter access to fintech firms. But new leadership could strengthen the OCC’s focus on coordinating with other agencies, observers say.
The OCC, for example, had diverged from the Federal Reserve on CRA reform. Yet now, a former official at the central bank, Michael Hsu, is the interim Biden-appointed comptroller. The agency’s general counsel, Benjamin McDonough, also came from the Fed. Other former Fed officials have a further role in financial policy at the Treasury Department, most notably Secretary Janet Yellen.
Some experts say a new perspective at the OCC will promote constructive dialogue between the agencies, in contrast to the agency’s go-it-alone approach during the Trump era. But others worry about former Fed officials having too much influence.
“Cross-pollinating the agencies in this way is something that we should applaud. I think it's a good thing that the new leaders of the OCC have experience not only at the Fed, but Ben McDonough started his career at the” Federal Deposit Insurance Corp., said Jeremy Kress, a co-faculty director of the University of Michigan’s Center on Finance, Law & Policy, and a former Fed attorney. “I think bringing experience from the other agencies can be very helpful.”
But others worry that the effect of former Fed veterans leading the OCC, for however long, could change the culture of the national bank regulator. Whereas the central bank tends to focus on financial stability and broad macroprudential issues, the OCC prioritizes direct supervision of banks’ safety and soundness.
Some analysts argue that the nuanced differences in philosophy, policy preferences and culture between the OCC, Fed and FDIC are a key part of what makes the U.S. financial regulatory system work well.
“You're going to have both the head of the agency but also the general counsel, who interprets what the law should mean, being former Fed officials,” said Gregory Lyons, a partner at Debevoise & Plimpton. “That combination is a pretty potent one to bring the Fed perspective into the OCC, which to my knowledge is a pretty unique situation.”
But some former OCC officials said that changing the agency's course could be challenging for Hsu and the broader Biden administration.
"The OCC prides itself in the way it does its business, and sees itself as quite separate, distinct and independent from the Fed and Treasury," said one former official, who spoke on the condition of anonymity. "But they're a bunch of professionals. I suspect they'll work with Acting Comptroller Hsu to do their jobs."
"He'll have his perspective, and he'll make some changes, I expect," the former official added. "But it's an agency with a very long history."
To be sure, the movement of key officials between the banking agencies is not unprecedented. For example, FDIC Chair Jelena McWilliams earlier in her career spent time as an attorney at the Fed.
But under the Biden administration, former veterans of the central bank also are making an impact at Treasury. (While the OCC is viewed as an independent agency, it is technically a bureau of Treasury.)
Yellen, a former Fed chair, appointed Hsu as acting comptroller. Nellie Liang, a longtime Fed economist, was tapped to serve as Yellen’s undersecretary for domestic finance, and Laurie Schaffer, a senior Fed lawyer, will serve as principal deputy general counsel at Treasury.
Lyons expressed concern that the influence of those former Fed officials could weaken some of the independence and innovations that made the OCC stand out, including a willingness to adapt the national bank charter for tech-focused firms.
“You do worry that you're losing some of the diversity of perspectives to kind of bring to the table,” Lyons said. “More generally, whether related to fintech charters or other areas, I do worry that what you risk losing is the ability to challenge historical approaches and create new innovative ways of doing banking.”
Others argue that the OCC, under the Trump administration, simply went too far and too fast in trying to craft financial policy without buy-in from other regulators. “I take the view that our bank regulatory ecosystem is built upon laws and norms, and it's self-governing. Along came the Trump administration, which violated all kinds of laws, all kinds of norms,” said Cornelius K. Hurley, lecturer at Boston University and a former Fed attorney.
Former Comptroller of the Currency Joseph Otting crafted a CRA reform rule without the support of other agencies, prompting criticism from bankers and others who urged the regulators to come together on a common regime. (The OCC, Fed and FDIC have all more recently shown support for trying to develop a uniform CRA rule.)
After Otting departed, former acting Comptroller Brian Brooks pitched the idea of a payments-focused charter for nonbanks and advanced a rule to penalize banks that restrict services to disfavored industries — both of which were opposed by the banking industry. Meanwhile, the OCC under multiple comptrollers has continued to fight a legal battle with state regulators over the agency’s new special-purpose fintech charter.
Given the OCC’s somewhat aggressive approach during the Trump administration, Hurley said, bringing in former Fed personnel to lead the agency could be interpreted as “more of a rebalancing of the regulatory ecosystem than a friendly takeover of the OCC by the Fed.”
The general supervisory and structural differences between the Fed and OCC are notable. While the OCC is the country’s national bank regulator and supervises the vast majority of the U.S. banking system by assets, the Fed’s bank supervisors are responsible for monitoring bank holding companies, making the two regulators responsible for overlapping-yet-distinct components of bank operations.
For decades, the OCC has been criticized by some advocates — particularly on the left — who say the agency has been too permissive of national bank activities, especially when it comes to the expanding powers and protections of the national bank charter at the expense of state bank charters.
“The OCC, to a certain extent, has had a reputation throughout all the administrations for being a cheerleader for the banking industry,” said Gilbert Schwartz, a partner at Schwartz & Ballen and a former Fed attorney. “In many instances, they have been very tough regulators on particular institutions when they've had problems, but in terms of looking forward, they are always pushing to make sure that the national bank charter gets full advantage of what they think the charter is entitled to.”
The Fed, by comparison, “has a more global view of the economy,” said Hurley.
“The Fed isn't there to cheer for a national bank charter or state charter,” he said. “They're there for economic stability. They're there for stable prices.”
However, others say the OCC should get credit for being ahead of the curve on understanding that regulatory models should evolve as fintech and other less regulated nonbank lenders have steadily increased their share of the financial system.
“The OCC has always been willing to take a fresh look at laws that have been on books for years, and apply them in ways that have allowed banks to change with the times,” said Dan Stipano, partner at Davis Polk and a former OCC attorney. “This is especially important now, with so many nonbanks providing financial services.”
In some areas of policy, such as reforming the CRA, analysts say the benefits of having greater cohesion between the federal bank regulators are obvious. The 1977 anti-redlining law is a complicated piece of regulation with high stakes for low-to-moderate income communities. Banks have said trying to stay on top of multiple and potentially competing CRA regimes could threaten their ability to serve their communities.
Others note that the Fed has taken a much more cautious and deliberate approach to allowing newer kinds firms into the banking system.
Since 2016, the OCC has attempted to court nonbanks with a special-purpose fintech charter that would allow chartered entities to only do certain bank activities, such as payment processing, and lower their overall regulatory burden. A firm authorized to process payments without deposit insurance would avoid supervision from the FDIC, for instance.
But the Fed — which controls access to the country's payment system — recently poured cold water on the idea, saying that it would expect non-depository firms to undergo "more extensive due diligence" before being allowed access.
In the past, the central bank was strongly opposed to non-financial firms such as Walmart attempting to use a specialized charter to open a bank.
“The Fed has traditionally been a very staunch defender of the separation of banking and commerce,” Kress said, whereas the OCC has signaled more comfort with those lines blurring. “With former Fed officials now in charge at the OCC, that could mean that the OCC may reorient some of its recent positions on the separation of banking and commerce.”
At the same time, others say the OCC has played an important role in advancing the development of fintech policy over the past few years.
“There is a point of view that says the Fed's been late to the party, and has been slow on fintech, but the Fed was quite rationally distracted last year by the pandemic and the economy,” said Meg Tahyar, co-head of the financial institutions group at Davis Polk. “[Former acting Comptroller] Brian Brooks had the time to pay attention last year, and he did.”
Brooks “did a lot of creative, innovative, fast-forward things in fintech,” Tahyar said. “Some of what he did pushed the envelope, some were straight down the fairway, like the interpretive letters on digital custody.”
Some analysts said it shouldn’t be taken as a given that Hsu will change the OCC. It could be the other way around.
“He is assuming leadership of another federal banking agency, and you can't really be successful in that role without the support of the staff,” Stipano said. “He is going to have to advance the administration's policy agenda, but he is also going to have to win over the staff of the OCC.”
Schwartz said across the federal government leaders are often “influenced by the institution” they serve.
“Instead of the OCC being influenced by somebody who's acting as the head of the OCC, it may very well be that the OCC converts them to the culture, like trying to make sure the national charter remains viable,” Schwartz said.
