Online Extra: A Talk with New York's Banking Watchdog

Diana Taylor says there's a happy medium for regulation at the state and national level. But the OCC's efforts to preempt state laws deserves scrutiny

New York Superintendent of Banking Diana Taylor heads up the largest and oldest state banking regulatory office in the country. The department is the primary regulator for all state-chartered banks, most foreign banks doing business in the U.S., trust companies, and financial outfits such as mortgage bankers and brokers, check cashers, and money-transfer offices.

Since 1997 the office has also been charged with aiding the recovery of assets looted during World War II, such as art or insurance policies, though its Holocaust Claims Processing Office, the only one of its kind in the country.

Taylor graduated from Dartmouth College with a degree in economics and received an MBA from Columbia Business School, where she majored in finance. As superintendent, a position she was appointed to by Governor George Pataki in June, 2003, Taylor has forced change in the way states relate to federal government agencies in the fight against terrorist financing and money laundering. Because small neighborhood money transmitters and community banks are often conduits for such activity, she sees state bank examiners as the first line of defense.

Taylor recently spoke with BusinessWeek banking and finance editor Mara Der Hovanesian. Edited excerpts of their conversation follow:

Q: One of the first things that happened when you took office was that the Office of the Comptroller of the Currency preempted state depository and lending laws. Now, all national banks report to the OCC and don't have to follow state laws. What impact did that rule have on consumers and your job as superintendent?


It was a shock to everybody. It really changed the landscape for banking regulation as far as the states were concerned. It not only affected the national banks but very importantly their subsidiaries, which includes mortgage companies. In the states, and New York in particular, we have developed a sophisticated set of rules and regulations for these entities to operate under.

I think it would be bad for the system as a whole if all of that work was thrown away. These entities are regulated better at the state level because we know what the issues are, we're on the ground, we're more accessible.

Q: Is there no merit to what the OCC is trying to do?


In its defense, the OCC is trying to make the regulatory system more efficient. Each state passes laws and municipalities pass laws and that makes it very difficult for banks to operate across state lines. It's very inefficient when every state has its own set of rules and regulations.

That being said, Congress needs to make it clearer what it meant by the laws that it passed, particularly what the power of the state banking departments are and what the powers are at the national level and what preempts what. It's a little bit unclear.

Q: Is your aim to help get that done?


My agenda is to make sure that the issue is discussed. It's absolutely wrong for an unelected bureaucrat [former OCC head John Hawke, now retired] -- a very good one, but nonetheless unelected -- to completely change the landscape of banking regulation in this country. I don't think that any one person should have the power to do that. What the comptroller did literally takes an act of Congress to change.

The only constituency that was included in making this decision was the national banks. There are still the small banks, there are the state legislatures, consumer groups, community groups, all kinds of different stakeholders who are affected by this and who ought to be given a say.

Q: You're a regulator, but you say there's a risk of having too much regulation?


There's a happy medium. Internally, we're having these discussions about what we should be looking at because things have changed so rapidly. What is the role of the regulator? Is it just safety and soundness? How much should we be concerned about consumer protection? Then there's the question of what's the purview of the regulator and what's the purview of law enforcement? When is the bank institutionally liable for some action or inaction? When does it stop with the individual involved?

But overregulation is by far the biggest risk. You don't tell a bank how to make loans and you don't regulate fees. You have to be clear what the rules are and know the standard and don't change all the time.

Q: Why was it so important to revisit the regulation and examination of money transmitters, for example?


A lot of banks have stopped doing business with money transmitters and check cashers. But there are billions of dollars that get transmitted every year from New York to the Dominican Republic, Haiti, Colombia, and Mexico. A very large part of these countries' economies depend on the transmission from immigrants, and so it would be a serious hardship for a lot of people if they couldn't conduct this business.

Because of the more stringent application of the Patriot Act and "know your customer" rules and the Bank Secrecy Act, there have been some cases recently where banks have been seriously penalized. So the banks are looking at this and saying, "It's not worth the reputational risk, and we can't make enough money from this."

So we said, "O.K., what are we going to do as the banking department to help this problem?" That's where we decided to step up and actually examine these people and make it worth something to be licensed by the New York State Banking Dept.

Q: Before becoming an amateur ocean racer, your first boating experience was in the Long Island Sound at age seven. You say your instructor's first lesson was to capsize the boat. What did you learn from that?


We swam around, righted the boat, and took off sailing and thought, "That's the worst that can happen?" You pick yourself up and survive.

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