Thursday, December 5, 2013

He Can be Boston Proud...

...of the fine work produced in such a short time by the authors of the International Peer Review of OCC Supervision of Large and Midsize Institutions.  Hailing from the Commonwealth of Massachusetts, Comptroller of the Currency, Tom Curry, now has the opportunity to reflect, in the operations of the agency he leads, the example of resolute resilience and courage (as exemplified by Boston's 2013 post-Marathon experience) and the 'roll up your sleeves' hard work of reestablishing the preeminence of a major league championship team (in the tradition of the 2013 World Champion Boston Red Sox).  All without growing a beard, if he chooses not to.

Last month, the National Bank Examiner ran a story called From Hubris to Humility, applauding the Comptroller's efforts to improve the post-financial crisis bank supervision process for large and midsize national banks by initiating a third-party peer review by highly respected members of the global bank supervision community.  Today, Comptroller Curry released the report to the public and also formally accepted it on behalf of the Office of the Comptroller of the Currency (OCC).  

While prudently keeping his options open regarding the specifics of implementation, he set a goal of having implementation plans in place within 120 days.  I say prudently, because in government life, it is in the details where you find all of the devils of frustration and many of the speed bumps.

The 23-page report of the International Peer Review of OCC Supervision of Large and Midsize Institutions endorsed several of the bank supervision initiatives taken by the OCC since the financial crisis and emphasized the importance of their effective implementation across the agency.  The authors also noted the highly motivated, experienced, and professional staff who were "eager to respond promptly and fully to the numerous questions posed" by this outside third-party review team. 

The peer review team made seven key recommendations:
1. Revise the mission and vision statements and the strategic goals to make safety and soundness of institutions the OCC’s primary objective, consistent with compliance with applicable laws and regulations, including those regarding fair access and fair treatment of customers.
2. Enhance risk identification by expanding the role of Lead Experts (LEs) and ensuring that they have the capacity to provide meaningful input into the supervision of large institutions through review of examination papers and through the initiation of horizontal reviews.
3. Better integrate the systems for assigning supervisory ratings to institutions (CAMELS ratings) and the Risk Assessment System (RAS), make examination ratings more forward-looking, and devise a more flexible approach to the consequences of certain ratings downgrades.
4. Move examination teams and subject matter experts from individual bank locations to shared OCC offices in the field, where practicable, to improve internal communications, sharing of information among examination teams, and workforce flexibility. This will facilitate horizontal supervisory reviews and help to address staffing shortfalls, particularly in specialized skill areas, by allowing specialists to work on several institutions over a shorter period of time.
5. To further address staffing shortfalls, devise a program to use retirement-eligible staff as mentors and explore how to accelerate the integration of private sector experts into the examination force.
6. Enhance the scope and consistency of supervisory planning, risk assessment and intervention by enhancing the existing peer review process to involve all relevant Examiners-in-Charge (EICs) and Lead Experts, and by elevating key supervisory decisions such as material acquisitions to the Committee on Bank Supervision (CBS) and/or Major Matters Supervisory Review Committee (MMSRC).
7. Ensure that the Enterprise Governance function commences its proposed work on documentation of quality management practices as soon as possible and that the OCC utilizes this to determine the standard and consistency of practices it wishes to put in place across the agency.
While, on the surface, these recommendations look rather straightforward, a few, in fact, create existential angst.  For example, the first recommendation of setting the safety and soundness of institutions as OCC's primary objective.  Well, it's going to be interesting to see if OCC is any more successful in redefining its dual mandate - charter and supervise - as the Federal Reserve has been in redefining its dual mandate of price stability and full employment.  A marketplace-responsive and technology-sensitive national bank charter is a key component in the architecture of keeping banks, like ships, "centered in the channel" and for helping keep the "shadows" out of shadow banking.   A potentially sclerotic national bank charter, made so by mission redefinition, could be as much a danger to systemic financial stability as any possible neglect of bank supervision responsibilities.

OCC's own dual mandate is one reason why I urged last year that the Comptroller consider upgrading of the OCC's Licensing function to Executive Committee status in the National Bank Examiner story entitled License to Heal.

The remaining peer review report recommendations abound with complicating issues, but they are all fundamentally sound.  In fact, some restate longstanding, seemingly intractable, internal concerns.  Hopefully, these report recommendations can be implemented with a minimum of bureaucracy while retaining, and not diffusing, accountability.

A couple of incidental observations on the peer review report:

Interestingly, it seems that the innovative way now-Senior Deputy Comptroller Jennifer Kelly and Deputy Comptroller Bill Haas built the framework of supervision for midsize banks (literally a start-up operation several years ago) shows it to be a better model for large bank supervision rather than vice versa.

Again, through this report, we have a clarion call to revisit the CAMELS rating system, or more properly, the Uniform Interagency Financial Institutions Rating System (UIFIRS).  Getting the federal bank regulatory agencies to sit down and make this rating system responsive to modern risk management and preventive intervention principles seems like trying to make peace in the Middle East.  Adopted 34 years ago, in November of 1979,  and only lightly tweaked since, the UIFIRS is ripe for a sorely needed overhaul (or perhaps a re-imagining, replacing, and scuttling the old system after some statutory linkages are severed).

I echo the Comptroller's thanks to Jonathan Fiechter and his team of global bank supervision experts for creating a quality report within the time-frames established.  It is a template for change for the better.

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