Bloomberg
It’s encouraging to read about the
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Any initiative to enhance balance and consistency in the supervisory world is to be welcomed. Savvy leaders have always known that no two financial institutions are exactly alike and that there’s no single best way of supervising them and no best way for them to operate. Likewise, savvy examiners have always been able to look through the form to the substance of banking risk, and this streamlining should help them do that.
Nonetheless, I struggle with memories of what can happen if, in trying to achieve balance, the pendulum swings too far in the direction of laxity. Preserving the seasoned, substance-driven bank supervisors with know-how built up over decades is critical and must not be allowed to slip. Even more must we covet the will to intervene effectively in troubled cases while there’s still time to influence outcomes. Waiting until the “bullet is in the body” almost never ends well.
It comes with the territory that senior policy makers will occasionally feel — and pass along — well-intended pressure to ease up a bit. The most effective examiners over time have been those who knew how to pay proper heed to such influences without materially compromising their ability to continue calling things as they see them — never forgetting the importance of balance and professionalism in their work.
Lighter touch messaging needs to carry the caveat of “but stay diligent,” or some examiners will infer it means “no criticizing.” The greater danger is that this can lead to what amounts to a period of supervisory “wait and watch” that lasts beyond the point of no return. This pernicious phenomenon has helped bring on too many “surprise” calamities where problems stayed below the radar and went unreported too long.
It is also inevitable, in good times and bad, that examiners will hear allegations of zealotry and “nitpicking” from some of the institutions they supervise. Those laments should be taken and dealt with seriously, ideally through the agencies’ formal and informal appeal mechanisms. Those mechanisms have been degraded over the years to the detriment of the agencies and the banking industry. They need to be rehabilitated.
But fear of complaints and appeals should not cause examiners to be reluctant to continue practicing the highest levels of supervisory diligence and alertness in response to signs of deterioration. A solid appeals process with the guiding hand of the head of agency will not allow that to happen.
Risk-based supervision is indeed a challenging concept. Critical to its success are examiners who genuinely understand banking risks well enough to knowledgeably gauge the adequacy of systems and controls designed to mitigate them. The OCC is correct to focus on building up its examiner training schools and apprenticeships. I would also urge it to bring into the agency former industry experts who have practical up-to-the-minute experience, particularly in the fast-evolving innovative areas.
When deficiencies are exposed, there’s a fine line between recommending change and becoming the instrument of change itself. Doing it right means knowing when it’s necessary to cross that line, and when it’s not. It most certainly requires the right people — and enough of them. Not gunslingers, but not shrinking violets either. Otherwise, we put the industry, the economy and the whole supervisory mechanism at risk.