By Simon Johnson
The Office of the Comptroller of the Currency (OCC) is one the most important bank regulators in the United States – an independent agency within the Treasury Department that is responsible for “national banks” (for more on who regulates whom in the US, see this primer). Over the past decade the OCC repeatedly demonstrated that it was very much on the side of banks, for example with regard to fending off attempts to impose more consumer protection – James Kwak and I covered the history in our book, 13 Bankers; these details have not been disputed by the agency or anyone taking its side.
After suffering some serious and well-deserved loss of prestige during the financial crisis of 2008-09, the OCC survived the Dodd-Frank reform legislation and is now back to pushing the same agenda as before. In the view of this organization and its senior staff – including key people who remain from before the crisis – the “safety and soundness” of banks requires, above all, not a lot of protection for consumers. This is a mistaken, anachronistic, and dangerous belief.
Probably the most egregious mistake made by the OCC during the subprime boom was to push back against state officials who wanted to curtail malpractice in housing loans, including predatory lending. The OCC ultimately lost that case before the Supreme Court but its delaying action meant that an important potential brake on abuse and excess was not available – this definitely contributed to the worst business practices that took hold in 2006 and 2007 (see p.144 in 13 Bankers or this nice summary; here is Eliot Spitzer’s account).
Naturally, post-debacle the OCC talks an ostensibly better game but, as Joe Nocera puts it, “it sure looks as though the country’s top bank regulator is back to its old tricks.” In discussions regarding a potential settlement on mortgage foreclosures – and how they have been handled – the OCC has supported an outcome that is more favorable to the banks (see Nocera’s column for more details).
Now the OCC is insisting again that federal regulation preempts the ability of states to regulate in a way that would protect consumers.
The May 12, 2011 “OCC preemption letter” argues that the OCC Preemption Regulations are consistent with the Dodd-Frank Act (see this interpretation by a private law firm, which I draw on here). There is a lot of legalese in the letter but the basic issue is simple – are states allowed to protect their consumers vis-à-vis national banks, or do they have to rely on the OCC (and its weak track record)? The OCC is clear – the states are preempted, meaning that national OCC regulations will always overrule them on the issues that matter. (As a technical matter, the issue comes down to “visitation” or whether state level authorities can access bank documents without either the bank or the OCC having already determined that there is a problem.)
The American Bankers Association was, not surprisingly, delighted,
“The OCC’s action helps clarify the rules of the road for national banks and how they serve their customers.”
Richard K. Davis, U.S. Bancorp CEO and then chair of the Financial Services Roundtable, a powerful lobby group emphasized the importance of the preemption issue to national banks clearly in March 2010, during the Dodd-Frank financial reform debate in the Senate:
“If we had one thing to fight for, it would be to protect preemption.”
It is hard to know which would seem more incredible to a 2nd grader: we left in place the same agency that was responsible for a significant part of past misbehavior, or that this agency seems determined to continue with the same philosophy and policies.
The problem is not that the OCC sees its primary duty as the “safety and soundness” of the financial system. Rather the danger to the public arises because the OCC has consistently taken the view that the best way to protect banks – and keep them out of financial trouble – is to allow them to be harsh on consumers.
This is worse than short-sighted – it completely ignores all externalities, for example in terms of how business practices and ethics evolve; and it pays no attention to even the most basic macroeconomic dynamics, such as the fact that we have a credit cycle during which we should expect lenders to “race to the bottom” in terms of standards.
The OCC should have been abolished by the Dodd-Frank Act. It is unfortunately too late for Congress to revisit this issue. President Obama should at the very least put in a new head of the OCC – the job has been open since August of last year – and a serious reformer could make a great deal of difference.
The OCC is, under its current leadership, putting our financial system into harm’s way with its current approach. The lessons of 2007-08 have been completely lost on them. As Talleyrand said of the Bourbons, “they have learned nothing and forgotten nothing.”
An edited version of this post appeared this morning on the NYT.com’s Economix blog; it is used here with permission. It would like to reproduce the entire blog post, please contact the New York Times.
