This Bill Could Let Big Banks Take Bigger Risks
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The Fiscal Times
January 30, 2012

As President Obama and congressional Republicans continue to battle over the shape and scope of banking regulations in the wake of the financial crisis, lawmakers on Wednesday will hold a hearing on a bill designed to make it easier for banks to challenge the decisions of their government regulators. But at a time when Democrats and Republicans are sharply divided about stricter financial regulations enacted under the Dodd-Frank Act and the role of the Consumer Financial Protection Bureau (CPFB), this bill has already garnered support from both sides of the aisle.

The Financial Institutions Examination Fairness and Reform Act, introduced by Rep. Shelley Moore Capito, R-WV, and co-sponsored by Rep. Carolyn Maloney, D-NY, and a bipartisan group of more than 75 lawmakers, would give banks the right to appeal regulators’ decisions about individual banks’ safety and soundness to a third party.

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The bill would dramatically alter the relationship between financial institutions and their federal regulators – including the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., and the newly created CPFB – by creating an independent ombudsman to whom banks could appeal regulatory decisions. Bankers claim it would improve the bank regulatory system by making regulators more accountable for their decisions. “With the financial meltdown and the very aggressive exam environment that bankers have been dealing with for three years now, this is a time to look at that process,” says Paul Merski, chief economist for the banking trade group Independent Community Bankers of America.

Regulators and other critics of the bill counter that the new legislation would undermine regulators’ authority and create delays in addressing the problems faced by troubled banks.

Banks that are backed by federal deposit insurance – meaning virtually all of them – are subject to regular exams by federal regulators. These can be annual, bi-annual, or, in the case of huge banks, ongoing. Wells Fargo and other banks in that size category actually have teams of examiners permanently on site. Banks regularly complain about these examinations – but the main complaint now is that regulators are looking at levels of bank risk that were once considered acceptable and declaring them unacceptable.

“We have heard significant concerns about the fairness of the examination process for financial institutions and their ability to effectively appeal regulator decisions,” Capito says when the bill was introduced in November. “This legislation provides financial institutions with a fair and impartial process to appeal examination reports for federal financial regulators and providing further clarity to regulators.”

Merski of the Independent Community Bankers Association says that regulators came under heavy pressure to crack down on bank lending in the wake of the financial crisis and that in many cases they have gone too far, restricting banks’ ability to take on risk – which means limiting their ability to make loans. Many members of Congress who support the bill worry that the slowdown in lending is causing slower economic growth in their districts and across the country.

There is an existing process for banks to challenge regulators’ decisions. “But,” Merski says, “most bankers say that it doesn’t really work for them.”He explained that because the process is internal – grievances about decisions by the Office of the Comptroller of the Currency are heard by OCC staff – banks don’t feel they get a fair hearing, and fear retribution from examiners.

As with its fight against Dodd-Frank and the tighter scrutiny that will come from the CPFB, the banking industry is expecting pushback from regulators, says James Ballentine, senior vice president with the American Bankers Association. “The regulators are not fond of Congress or anyone instructing them how to do their jobs,” he says.

As a matter of policy, federal banking regulators do not discuss pending legislation, except in the context of a congressional hearing. But former regulators are under no restrictions.

John D. Hawke Jr., served for more than three years as the Undersecretary of the Treasury Department for Domestic Finance, and spent another six years as the Comptroller of the Currency, which made him chief regulator of all national banks in the U.S. Now a partner with the law firm Arnold & Porter in Washington, Hawke’s verdict on the bill is unambiguous. “I think it’s a bad idea,” he told The Fiscal Times. “The process of bank examination and supervision has always been a relatively informal process and the existing appeal remedy that is provided, while strictly internal, I think has worked reasonably well.”

Changing the system to one in which appeals are handled by a third party in a proceeding resembling a court hearing, he says, would fundamentally change the relationship between banks and their examiners--and not in a good way. “It would tend to inhibit bank examiners from the kind of frank and open sort of evaluations that they are expected to make,” says Hawke. “They would always been concerned that somebody outside the examination process – someone without the responsibility for maintaining the safety and soundness of an institution--would be second guessing them.”

Hawke pointed out that creating an appeals process like the one designed in the bill could create serious inefficiencies in a system where prompt action can be the difference between a bank failing and surviving. The bill allows financial institutions 60 days to file an appeal after they receive the final report from examiners. The constant filing of appeals, he argued, “could bog down the whole process.”

A longtime reporter on the intersection of the federal government and the private sector, Rob Garver is National Correspondent, based in Washington, D.C. He has written for ProPublica, The New York Times and other publications.