Regardless of who leads it, OCC has inherent conflict of interest

Regulation of the fintech industry has emerged as a flash point in the behind-the-scenes jockeying over President Biden’s choice to lead the Office of the Comptroller of the Currency.

Some progressives argue that Michael Barr, a former Obama administration official who is dean of the University of Michigan’s public policy school, is too close to the fintech sector, which has been angling for favorable treatment in Washington.

Barr’s critics point to his former roles on the advisory boards of the fintech firms Ripple and LendingClub, as well as his ties to the Alliance for Innovative Regulation, which advocates for greater use of technology in financial regulation and has received funding from the venture capital sector. Their concern is that Barr’s numerous connections to the industry will lead to light-touch regulation.

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Barr’s supporters say that he has a strong, decades-long record on consumer protection and financial inclusion, which are key issues in the context of regulating upstart fintech companies.

Mehrsa Baradaran, a University of California, Irvine law professor who is a strong advocate for postal banking and racial justice in the financial sector, has also been under consideration for the comptroller job. She has the support of some prominent Democrats, including Senate Banking Committee Chairman Sherrod Brown of Ohio.

The hard-fought, intraparty contest has focused attention on an important issue: whether the U.S. fintech sector will be regulated in an industry-friendly manner, or more skeptically. But it has also obscured a more enduring reality: personnel is not the only force that affects policy. Financial incentives also matter a great deal.

Of the four federal banking agencies, the OCC is the only regulator that gets its funding almost entirely from the examination fees paid by the companies that it oversees.

The Federal Deposit Insurance Corp. receives deposit insurance premiums from all U.S. banks, no matter which agency is their primary regulator. The Federal Reserve derives its revenue mostly from the loans and securities it holds. And the Consumer Financial Protection Bureau’s funding comes from the Fed.

By contrast, more than 95% of the OCC’s $1.1 billion in revenue during the last fiscal year came from fees paid by firms that opted for national bank charters. That structure gives the OCC an incentive to interpret its congressionally granted authority broadly, in ways that enable it to oversee new parts of the financial industry, unless courts intervene to prevent it from doing so.

In addition, it is easy to see how a reliance on fees from the companies an agency oversees might compromise its independence. If the OCC takes a tougher than expected stance, the regulated firm can take its business elsewhere.

“How an agency is funded can affect the agency’s risk of regulatory capture,” the Government Accountability Office wrote in a 2017 report. “Where there is a risk of regulatory shopping or arbitrage, regulators may feel pressured to promote legislation or make decisions that favor regulated firms in order to attract and retain the regulated entities.”

The OCC has long fought for turf with state banking regulators that also depend financially on the fees they collect from depositories. One key advantage of an OCC charter is that companies that operate across state lines, as fintechs typically do, reap certain benefits.

During the subprime mortgage boom of the early 2000s, the OCC took stances that allowed national banks to avoid complying with state predatory lending laws, providing a carrot for banks to switch charters.

In a 2002 interview with The Wall Street Journal, then-Comptroller John D. Hawke Jr. acknowledged that losing market share was a concern for the agency, and noted that the ability to override state laws was one of the advantages of a federal charter. “I’m not the least bit ashamed to promote it,” added Hawke, an appointee of President Bill Clinton.

The Dodd-Frank Act of 2010 made it harder for the OCC to preempt state laws, but it did not alter the agency’s structural incentive to protect and expand its own territory. During the Obama and Trump administrations, the OCC pushed aggressively to bind itself to the fast-growing fintech industry, despite strong pushback from the states,members of Congress and the courts.

In late 2016, then-Comptroller Tom Curry, an Obama appointee, announced that the OCC would consider applications for a special charter for fintechs. And shortly before he left the agency, the OCC dismissed concerns about the potential for so-called charter shopping between state and federal regulators.

The agency’s embrace of fintech continued under Comptroller Joseph Otting and accelerated last year under acting Comptroller Brian Brooks, who introduced the idea of a payments charter and embraced cryptocurrency.

Since January, the OCC has granted approval to two cryptocurrency platforms to operate national trust banks. “I don’t want to be the taxicab commission,” Brooks told Forbes last year. “If everyone wants to ride Uber, it’s not my job to say you can’t.”

Before joining the OCC, Brooks was the chief legal officer at the crypto platform Coinbase — a fact that was frequently noted in the context of the agency’s embrace of digital currencies during his tenure.

What drew less attention was how Brooks’ brief stint was consistent with the agency’s history. It highlighted the OCC’s long-standing tendency to stretch the limits of its authority in ways that add to its own coffers.

While it is too early to assess the OCC’s record of regulating fintech companies, there is reason for concern about the potential for a race to the bottom, with different agencies vying for business by dangling the prospect of less rigorous oversight.

Members of Congress have the power to do more than just confirm or reject Biden’s choice to head the OCC. They also have the authority to change the agency’s incentives, so that the OCC, like other federal banking regulators, doesn’t have to worry about biting the hand that feeds it.

Bankshot is American Banker’s column for real-time analysis of today's news.

Correction: An earlier version of this article misstated the Senate committee that Democrat Sherrod Brown of Ohio chairs.