Regulation is only one piece of the puzzle in government oversight of banks. The other key component is supervision – the direct, on-site examination of banks for compliance with laws and rules. Unlike regulation, supervision operates behind closed doors, shrouded in secrecy and subjectivity. Policymakers, academics and industry experts provide valuable insights into the flaws of the current supervision regime and how that regime has lost its way.
Governor Michelle Bowman, Federal Reserve
“Supervision operates almost entirely outside of the public view. Much of the work involves the review of proprietary business information from banks, and the preparation of examination reports shielded from public scrutiny under the auspices of protecting confidential supervisory information. But confidentiality should not be used to prevent scrutiny and accountability in the assignment of ratings.” (Source)
Chairman French Hill (R-AR), House Financial Services Committee
“There should be more fairness, accountability, and transparency in the bank examination process, including a new process for institutions to appeal supervisory determinations …” (Source)
Eugene Ludwig, Former Comptroller of the Currency
“Too often examiners do not discuss concerns persuasively with management, or allow enough time to make changes where changes make sense. Rather today, there is a hair trigger concerning MRAs, MRIAs and even supervisory orders. It should not be necessary to take such confrontational steps where management is vigorously taking steps to deal with safety and soundness or compliance matters. …Too often today, banks and supervisors spend so much time on processes and procedures they lose focus on the most dangerous issues.” (Source)
Randy Quarles, Former Federal Reserve Vice Chair for Supervision
“[S]upervisory ratings are confidential and have immediate effect. Banks are not permitted to disclose them. Although, as I have discussed, there are published standards as to how bank supervisors should assign these ratings, there will always be borderline cases and close calls, and these decisions are made out of the view of the public. …A firm with unsatisfactory ratings faces significant competitive disadvantages relative to firms deemed to be satisfactory. As noted, these firms are prohibited from expanding their range of financial activities and will generally face headwinds in acquisitions.” (Source)
Raj Date, Former Deputy Director of the CFPB
“The expense of this oversight – and believe me it is incredibly expensive – would surely be worth it if our supervisory efforts were laser-focused on critical risks, provided real-time directives to fix problems, and gave banks a clear understanding of the rules of the road. But that is not the case.” (Source)
Chairman Jerome Powell, Federal Reserve
“What happened was, I would say, a lot of focus on process and on governance and controls and not enough focus on basic bread and butter banking: credit risk, liquidity risk, interest rate risk, things like that.” (On the Fed’s supervision of Silicon Valley Bank) (Source)
Stephen Gannon, Davis Wright Tremaine
“Unfortunately, management has come to mean almost anything that supervisors find to be unacceptable, regardless of whether there is an impact on the financial health of the bank. And a poor management rating can have disastrous consequences for banks’ business going forward. Compounding the problem, this kind of arbitrary discretion is not subject to meaningful challenge. Supervisory examinations are shrouded in secrecy and are not available for any effective review by the very banks whose information is being analyzed.” (Source)
Karen Shaw Petrou, Federal Financial Analytics
“Large examination bureaucracies are at grave risk not just of lethargy, but also of being encumbered by so many internal reporting requirements and conflicting incentives that they lack the ability to distinguish material weaknesses from minor failings and then to rapidly resolve or punish persistent material weaknesses and violations. With so many examiners who, like all employees, are worried at least as much about themselves as about bank safety and soundness, there is no way to ensure that supervision does not spend so much time examining superficial scratches that mortal danger is missed.” (Source)
Stephen Scott, Starling
“Our current system fails to provide objective measures on how to assess ‘management quality’ and, worse, an insistence on secrecy assures that supervisory subjectivity remains incontestable … Reliance on subjective assessments and opaque decision-making, coupled with a system that [penalizes] firms without offering them a fair chance to contest or understand the basis for those penalties, stifles innovation, restricts growth and undermines trust.” (Source)
Committee on Capital Markets Regulation
“The ‘M’ component of the current CAMELS rating system … should be eliminated. Management is part of each of the other component ratings: for example, management is a key component of assessing the bank’s Liquidity component, as stress testing and backup planning are part of that exercise. Currently, examiners exercise confidential enforcement authority that can impose significant costs and operational restrictions on a bank that has an unsatisfactory ‘M’ rating, even if the bank is in strong financial condition…” (Source)
Senator Thom Tillis (R-NC), Senate Banking Committee
“We have clearly seen reputational risk being overused by bank supervisors, bank examiners saying, ‘well, maybe you want to move out of there,’ and it changes depending upon who’s in the White House. I don’t think that that’s right in either case. Banks should be able to figure out what they can do to drive value and serve their customers.” (Source)
