Transcription:
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Penny Crosman (00:03):
Welcome to the American Banker Podcast. Over the past year, national bank regulators have come under scrutiny. Their oversight of Silicon Valley Bank, Signature Bank, Silver Gate Capital, and other banks that failed earlier this year has been criticized. The Wall Street Journal recently reported claims of a toxic workplace at the FDIC and the OCC. It was recently discovered, hired someone as deputy controller and overseer of FinTech, who had easily discoverable falsehoods in his resume. Here to unpack all of this with me today and to think about what it might mean for the future is Michele Alt, Co-founder and managing director at Klaros Group. Welcome, Michele.
Michele Alt (00:46):
Delighted to be here.
Penny Crosman (00:48):
Thanks for coming. So let's start with the regulator's role in the bank failures earlier this year, which some people called the mini bank crisis or the S bank crisis, but four or five banks all kind of went under as a result of bank runs and then basically balance sheets that weren't able to survive bank runs and regulatory actions that came as a consequence. So the Office of Inspector General for the Federal Reserve Board and the CFPB issued some reports about this, and a report on Silicon Valley Bank, for example, said the supervisory approach for SVP did not evolve with its growth and increased complexity, and the examiner should have been more aware of risks from rising interest rates on the bank's investment securities portfolio. The OIG report on the collapse of Silver Gate Capital found that regulators did not require Silver Gate to obtain the board's approval, nor did they implement conditions. As the bank evolved to a novel business model focused on the crypto industry. They also found that examiners could have taken more aggressive and decisive action to address concerns, and that the board lacked guidance for examiners that were supervising banks projecting or experiencing significant and rapid growth. What was your reaction to all of this, and do you have a sense of whether the Fed could or should have done more than it did earlier on as these banks started to fail?
Michele Alt (02:26):
Well, Penny, I want to start by saying that the various "S" bank failures were primarily failures of the bank's risk management practices, not the regulators, failure of oversight. Banks are responsible for their own risk management, and particularly in this case, their interest rate risk management. That said, the Fed has been open to examining their failures here, their shortcomings, Michael Barr oversaw the production of the BAR report. And of course, you just mentioned the Federal Reserve's OIG report, which notes that despite significant warnings, and this is specifically with regard to SVB, examiners at the Fed did not sufficiently scrutinize the risks from rising interest rates on SBS held to maturity investment securities portfolio. So there was certainly a failure there as well.
Penny Crosman (03:41):
And do you think that's especially true, given the fact that the Federal Reserve itself was raising interest rates, which caused a lot of pressure on a lot of these banks balance sheets because they had so many treasury bonds that dropped in value as their interest rates rose?
Michele Alt (04:01):
Well, yes. The Federal Reserve, it has two primary functions and they're distinct. One is setting monetary policy, and the other, of course is bank supervision. Now, bank supervision and the supervision of one particular bank, say SBB, certainly shouldn't be the tail that wags the dog of monetary policy because the monetary policy, the interest rate policy impacts our entire economy. That said, I don't know that Jerome Powell could have been any more transparent in his intention to raise interest rates. They kept announcing that interest rates would be increased as long as inflation remained a threat. So they were very, very public about their intentions. Why that didn't translate into supervisory practices, particularly focused on how banks were going to manage the resulting liquidity pressures. I don't know.
Penny Crosman (05:15):
So it was public information that anyone could have access to?
Michele Alt (05:19):
Yes, yes. Public information and very highly watched of extreme importance. Too many in the industry. So it's puzzling.
Penny Crosman (05:31):
In the case of Signature Bank, I know that Barney Frank, who was on signature's board, told several different news outlets that the government, the only reason the government shut down signature was because of all of its business with crypto related firms. What was your reaction to that?
Michele Alt (05:51):
I don't buy that for a minute. I just don't. Of course, there is a fair amount of schadenfreude that the architect of one of the chief architects of Dodd Frank and the many, many restrictions that resulted from that legislation was himself on the board of a bank that failed. So there's some embarrassment there, but when it comes to closing a bank, closing a bank is a very big deal. It's a disaster. It's an embarrassment to the regulators. It's a disaster to the bank itself. It's personnel. It's a deep disappointment and an unsettling experience for its customers, right? So regulators go to great lengths to avoid closing a bank, but they will do so when they conclude a bank is no longer able to operate safely and soundly. So I trust that the regulators concluded that despite the unfortunate consequences of closing the bank, that it was necessary to do so. I don't think that this was a political action or one taken lightly or based on the preferences for certain types of activities in the bank.
Penny Crosman (07:14):
Well, speaking of embarrassments, there was a story in the Wall Street Journal a few weeks ago about reports of a toxic environment at the FDIC. They interviewed more than 20 women who had left the agency and spoke of episodes of harassment and a culture where it wasn't according to these women, it wasn't properly addressed. What was your reaction to that story?
Michele Alt (07:43):
Heartbreak. The allegations were heartbreaking. There were women who suffered in the workplace. They left their jobs. In some cases. They apparently felt that their concerns were not worth reporting in some cases, and in others falling on deaf ears. That is a heartbreaking situation.
Penny Crosman (08:09):
And then more recently, it came out through a publication called The information that the person that the OCC hired in March to be Deputy Comtroller and Chief Financial Technology Officer, his name was Prashant Bhardwaj. It turned out almost everything on his resume was false, and some of these claims could have been fairly easily uncovered in a routine background check. What were some of your concerns about that news?
Michele Alt (08:44):
That story is just astonishing, penny to me and to other OCC folks past a present with whom I spoke over the weekend. Since the news came out, various words in addition to astonishment were bonkers, baffling, confusing. My concern is what information and systems did this man have access to? And for how long? And what was the follow-up? So the systems, of course, at the OCC contain highly confidential supervisory information. They contain PII, personal personally identifying information, OCC employees, bank employees, bank customers. So this is data that is very sensitive and could be misused. So that was my primary concern. What happened and what was the follow up?
Penny Crosman (09:51):
And I think you said that when you were hired at the OCC, there was a very thorough background check.
Michele Alt (09:58):
I was hired when I was 28 years old, I believe 26. So I was an entry level lawyer, very junior, very young. I distinctly remember being interviewed on a wide range of topics, including my ex-boyfriends. So it was very intrusive and very detailed. These, of course, were before the days of Google and the internet. But in this case, it's amazing to me that, as you said, easily verifiable information was missed, just again, baffling and bonkers.
Penny Crosman (10:39):
Yeah, good reason to keep a good relationship with one's exes, I guess. So I don't know that any of these things really have much in common, except that they raise questions about various things going on at the three major bank regulators. But do you think that in the wake of these episodes, we might start to see some changes perhaps next year, both internally within these agencies and in the way that banks are supervised?
Michele Alt (11:17):
Yes, and I think there is a through line here, even though each of them has distinct facts and subject matters, the through line between the SVB, et cetera failures, the FDIC, toxic workplace scandal and the OCC being conned, is that they raise the same set of questions, which in my opinion are what did the top reaches of the agencies know? When did they know it? What did they do about it, and what should they have done? And I think that's going to translate in the coming months and year in three ways. I think we're going to see tougher exams, heifer bank, bank exams, the regulators right now, because all of these issues are embarrassed and they want to be seen as having a very firm grasp on what is happening at their banks. I think there's a distinct embarrassment related to the OCC having been conned by the person who goes to oversee the financial technology office.
(12:50)
The OCC in particular will need to demonstrate tech savvy, the ability to oversee technology issues and the risks that they pose at national banks that the OCC supervises. So I think we're going to see additional enforcement actions, particularly in the banking as a service area. And again, those actions would be to demonstrate that the regulators understand FinTech partner risks. And the third thing that I think will happen is that we will see key regulatory initiatives stall. For example, the Basel three end game already subject to fierce lobbying and opposition in some quarters is being used right now. It was used just recently in the House Financial Services Committee hearing on Prudential oversight was used as an example in the eyes of Chair McHenry that the agencies are acting politically rather than hewing to their statutory mission. And so an example of in McHenry's View overreach and further McHenry said that these kind of political actions have led to the regulators grossly mismanaging their agencies and pointing to the FDIC scandal, if the OCC story has any legs, I'm not sure it does today, Monday, the day after Thanksgiving, that will feed that narrative a little further.
(14:47)
And I think that it will make the more controversial regulatory initiatives, Basel three, the D'S corporate governance and risk management guidance, more difficult to finalize
Penny Crosman (15:01):
On that point. Some people have suggested that we shouldn't overreact to some of these episodes and then, say, take power away from regulators or politicize their behavior and basically not let them do their jobs because of these things that have happened. Would you agree with that, that you don't want to go the other direction and say, as some politicians have done that some of these regulations should be unwound or regulatory judgements should be undone?
Michele Alt (15:41):
Absolutely. I would agree that it's important not to let politics enter bank regulation. And I know that seems naive or perhaps just aspirational. However, I personally was a long time red writer. I know how hard the agencies all of them work at preparing regulations and following a processes for adopting them. I personally witnessed very few incidences in my career of any kind of political interference with that process. And I think it's important that these processes be allowed to play out in as neutral and environment as possible.
Penny Crosman (16:38):
Well, Michele Alt, thank you so much for joining us today.
Michele Alt (16:42):
It was a pleasure.
Penny Crosman (16:43):
Thank you for listening to the American Banker Podcast. I produced this episode with audio production by Kellie Malone Yee. Special thanks this week to Michele Alt at Klaros Group. Rate us, review us and subscribe to our content at www.americanbanker.com/subscribe. For American Banker, I'm Penny Crosman and thanks for listening.