Big Banks Face Sharper Risk-Management Focus in OCC PlanJesse Hamilton
Big banks such as JPMorgan Chase & Co. could face quicker reprimands for risk-management failures under an Office of the Comptroller of the Currency policy shift proposed today.
The national-bank regulator’s new standards remove hurdles to targeting lenders with certain enforcement actions. The 79-page proposal follows agency chief Thomas Curry’s push to clean up risk-taking at banks hit with billions of dollars in penalties over misdeeds in the wake of the 2008 credit crisis.
“The standards announced today build on lessons learned from the financial crisis,” said Comptroller of the Currency Curry, in a statement. “They will contribute to a safer financial system for all of us by providing clear and enforceable standards for the risk management and governance of our largest institutions.”
Under Curry’s leadership since 2012, the OCC has extracted the largest penalties in its 150-year history. The agency fined London-based HSBC Holdings Plc a record $500 million in 2012 for money-laundering faults and has penalized JPMorgan twice -- reaching a $300 million settlement over the London Whale trading losses and a $350 million agreement resolving allegations that the bank failed to report suspicions about Bernard Madoff’s Ponzi scheme.
“The OCC is making clear what we expect from the large, complex institutions we regulate,” OCC Chief Counsel Amy Friend wrote in an e-mail before the policy’s release. Those that don’t comply will run into a “more streamlined” enforcement process, she wrote.
The new guidance -- open to a 60-day public comment period -- applies to banks with more than $50 billion in assets. It says a company should document “risks to the bank’s earnings, capital, liquidity, and reputation that arise from all of its activities.” The document also details how boards should be “questioning, challenging, and, when necessary, opposing, management’s proposed actions” that threaten to take undue risks.
Curry has said his agency shares blame for not spotting problems before they blow up. Last year, he established internal reviews of the OCC’s performance and recently invited regulators from Canada, Australia and Singapore to look at the agency’s bank supervision.
The “heightened expectations” initiated by Curry have already seen OCC examiners insisting that banks achieve risk-management grades of “strong” instead of just “satisfactory,” that boards show they can stand up to management and that companies demonstrate their ability to hire people who can run operations in a safe manner.
“It helps to have it in writing,” Curry told reporters after a Sept. 23 speech in which he announced plans to “formalize” the standards. “It’ll actually have some teeth in terms of its enforceability.”
Typically, when examiners see a bank engaging in improper practices and can’t easily resolve the issue, the OCC can impose a cease-and-desist order. That involves a formal complaint, the option of a hearing before an administrative law judge at which the agency has to justify its accusation and the potential for a court appeal.
Under the new guidance, the OCC will be able to tell a bank to resolve any violation of standards. If it doesn’t produce or adhere to a plan, the agency can more quickly respond with a safety-and-soundness order, which Friend said has the same legal weight as a cease-and-desist.
“The OCC can enforce the order through the assessment of civil money penalties,” she said.
This new approach would let the agency skip a judicial hearing on the way to issuing an order, said Robert Serino, a partner at Buckley Sandler LLP in Washington who formerly ran the OCC’s enforcement and compliance division.
“The agency can just summarily conclude that you’re not satisfying the standard,” said Serino. In this situation, “there are no independent eyes.”
Ralph Sharpe, another former director of OCC’s enforcement and compliance unit who is now a partner at Venable LLP in Washington, said the move “certainly gives the agency a lot more leverage to work its will.”
The nation’s biggest banks have continued to make major missteps in areas such as mortgage servicing and suspicious-transaction compliance even after their risk-management failings contributed to the financial crisis, Curry said. He said that has reinforced his view that the OCC needs to focus on how banks are being run.
“It’s pretty clear that he wants to send a strong signal to large banks in particular that the OCC is going to spend a lot more time looking at internal controls and risk management and expecting directors to be a lot more engaged,” Sharpe said. Large U.S. banks will be closely studying the language of the new standards and are concerned “about how all this gets implemented,” he said.