Monday, January 7, 2013

A Year of Proud Achievement,
 but an Embarrassment of Riches...

Artist: Kate O'Connor

Surfing over the holidays, I saw that the OCC's Fiscal Year 2012 Annual Report has been published.  Surprisingly, the availability of this important document was unheralded by an OCC press release.  Every national bank and savings association CEO and board member should read it, as it puts perspective to the enormous amount of work done by the staff and management of the Office of the Comptroller of the Currency during the last year.

Like corporate annual reports, the OCC Annual Report celebrates and extols successes and achievements.  And since the OCC is one of the Federal agencies at the epicenter of the effort to help manage through the debris of the financial crisis and help build the architecture to (hopefully) keep it from happening again, those successes are critically important to the nation's financial and economic health.

The list of achievements and initiatives is impressive.  In addition to critical ongoing bank and thrift supervision work and the sensitive integration of the former Office of Thrift Supervision (OTS) into the OCC, there were international capital and liquidity standards;  Dodd-Frank rule-makings (including stress testing, use of credit ratings, adjusting lending limits to include derivatives, and the Volcker Rule rule-making);  implementing the Mortgage Foreclosure Agreement;  highlighting the emergent role of operational risk as a headline risk;  high-profile enforcement actions in the areas of the Bank Secrecy Act and unfair and deceptive banking practices;  and guidance on capital planning and stress testing for community banks.   The Oscar nominee for best 2012 OCC communications initiative is the publication of the Semiannual Risk Perspective, which points out threats to bank safety and soundness and makes for a great input document for bank capital planning purposes.

Stumbles (like HSBC and JPMorgan Chase) have been re-framed as fumble recoveries (enhanced expectations for corporate governance and an internal appeals process), as they should be.  The fumble is the unrecoverable past, the recovery is the most important... it is the actionable future.

It isn't until you get to the back of the Annual Report that a breathtaking moment hits the reader.  The OCC's statement of financial position shows an investment portfolio of $1.38 billion!  Putting it in some sort of perspective, it comes out to $361,000 per full-time equivalent OCC employee.

The reader's eye then immediately wanders over to what used to be called Comptroller's Equity, but is now called Net Position.  That stash represents the cumulative net excess of the OCC's (and the former OTS's) assessment and fee income over the the cost of agency operations over the years.   At $1.07 billion, this accumulated amount is then sliced into some pretty generous reserve allocations.  Generous considering the Comptroller's unfettered pricing flexibility to adapt his assessment schedule to any “ foreseeable, but rare events” and then collect those assessments twice a year.  Some smoothing through the use of reserves is wise to avoid whipsawing national bank and thrift assessments, but at some point, necessary prudence becomes hoarding behavior.

Net Position is also understated from a market value perspective, since it doesn't include the “hidden reserve” represented by the value of the former OTS headquarters property.  The former OTS headquarters is prime commercial property adjacent to the White House.  The carrying value for the land and building is $23 million, the market value is exponentially higher.

Shortly after former Comptroller C. Todd Conover's 1981 swearing-in, he noticed a similar situation.  A Reagan conservative and staunch proponent of banking deregulation and government efficiency, he saw that his Comptroller's Equity was well in excess of the agency's needs.  He proceeded to “dividend” a significant chunk back to the national banks.   Comptroller Curry has an opportunity to do something similar with assessment rebates or the like.

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