By Lalita Clozel
WASHINGTON -- After years of acrimony, the nation's top banking
regulators are seeking a detente with the firms they oversee.
Two Trump-appointed officials have spent several months touring
the country, visiting bank examiners in regional offices and asking
examiners to adopt a less-aggressive tone when flagging risky
practices and pressing firms to change their behavior.
The officials -- the Federal Reserve's Randal Quarles and the
Federal Deposit Insurance Corp.'s Jelena McWilliams -- aim to
change regulation in a small but significant way and reshape
regulators' relationship with banks, which officials have said was
too contentious during the Obama years that followed the financial
crisis.
Changing the supervision culture "will be the least visible
thing I do and it will be the most consequential thing I do," Mr.
Quarles, the Fed's vice chairman for supervision and regulatory
point person, said in an interview. "The banks should feel that
their supervisor is going to be firm but fair."
Critics say friendlier examiners could blunt the effect of
postcrisis rules, giving banks more freedom to engage in riskier
practices.
"We have this constant cycle of crisis, regulation,
deregulation, crisis, " said Jeremy Kress, a professor at the
University of Michigan's Ross School of Business and a former Fed
lawyer. "It's in that deregulatory time period that risks start to
build."
The 2008 financial crisis stung regulators, who missed risks
building across the banking sector. In the years following,
examiners tightened the leash on banks, handing out more citations
over issues such as credit risk and governance controls. They sat
in on board committee meetings, downgraded many banks' supervisory
ratings and pressured them to avoid activities deemed risky.
The Fed also created annual "stress tests" and publicly
embarrassed banks who didn't pass -- most prominently with
Citigroup Inc.'s startling failure in 2014, which put CEO Michael
Corbat's job in jeopardy. When banks began boosting leveraged
lending to highly indebted companies, regulators instructed them to
tighten underwriting standards and enforced them aggressively.
That is changing. In the past, "you would meet with the bank
regulators and it felt like it was us versus them," said American
Bankers Associations executive vice president Wayne Abernathy. Now,
"they're really listening."
In September, the Fed, FDIC and three other financial regulators
issued a statement affirming that supervisory guidance -- informal
documents that serve as yardsticks for examiners to evaluate banks
-- can't be used to punish a firm unless it has broken a specific
law or rule. The Fed is also developing a new rating system for
large banks that could expand the ability of firms to address
deficiencies identified by examiners before they are formally
punished.
If bankers feel examiners are overstepping their authority, "let
us know, " Ms. McWilliams, the FDIC chairman, said in an interview.
During a recent North Carolina trip, a banker told her he kept the
two-page joint statement from September laminated by his desk. "If
that works for you," Ms. McWilliams responded, "all of you should
print and keep it."
For their part, bankers have long complained that regulators
enforce guidance improperly, holding them accountable for standards
that are supposed to be voluntary. With regard to leveraged loans,
regulators in 2013 instructed banks to apply higher underwriting
standards for leveraged loans, pushing banks away from such
lending.
But in the Trump era, regulators have distanced themselves from
that guidance. Mr. Quarles in January said it "is not something
that is cited in supervisory actions." Banking regulators have said
that they were monitoring banks' exposure to that market.
The internal effort to change the culture among examiners has
included specific directives from Trump-appointed officials. Mr.
Quarles told Fed examiners to include positive feedback in their
reports instead of focusing only on deficiencies, according to the
Fed.
"The coach is demanding as much as ever from the sidelines --
it's just that every now and then he's throwing some 'Good job!'s
and 'Way to go!, '" said Michael Silva, a former big-bank
supervisor at the Fed and partner at law firm DLA Piper.
Comptroller of the Currency Joseph Otting has also changed the
tone from the top at his agency, calling banks his "customers." Mr.
Otting said in a written statement he has "empowered examiners to
use their expert judgment in the ongoing supervision of banks,"
while working "to reduce unnecessary burden of specific regulations
and requirements."
Supervision has become a particularly salient issue for large
banks, which have received limited relief under the Trump
administration compared with smaller peers. In multiple meetings
over the past year, they have urged regulators to address what they
view as a capricious attitude from examiners.
The topic was discussed in a series of October meetings between
the CEOs of Bank of America Corp., JPMorgan Chase & Co. and
several other large banks, and their regulators, including Messrs.
Quarles and Otting, according to people familiar with the
matter.
Meanwhile, by easing capital, stress-test and other
requirements, regulators are putting more onus on examiners to
identify emerging risks at the banks. The Fed plans to remove a key
liquidity requirement for midsize banks with $100 billion to $250
billion in assets, making evaluations the primary tool in
determining whether these banks have enough assets that could be
converted into cash in a credit crunch.
There are exceptions. Wells Fargo & Co. remains very much in
the regulatory spotlight and continues to have its assets capped,
and growth curtailed, under an unprecedented sanction imposed by
the Fed earlier this year.
And some bankers say they have yet to see significant changes in
the supervisory process. In November, two banking trade groups
publicly pressed regulators to add muscle to the September guidance
directive by turning it into a formal rule.
Banks are suffering from "examiner criticisms that do not deal
with any violation of law," said Greg Baer, CEO of the Bank Policy
Institute, one of the two groups behind the request.
Trump-appointed leaders acknowledge that changing the culture of
the agencies -- each of which has hundreds of examiners stationed
in offices across the country -- will take time. "All of this will
be difficult to quantify except by air miles," Mr. Quarles
said.
Ryan Tracy contributed to this article.
Write to Lalita Clozel at Lalita.Clozel@wsj.com
(END) Dow Jones Newswires
December 12, 2018 13:26 ET (18:26 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.