In November, Joseph Otting was sworn in as the 31st comptroller of the currency. The Office of the Comptroller of the Currency (OCC) supervises nearly 1,400 national banks, federal savings associations and federal branches and agencies of foreign banks operating in the United States to ensure that they operate in a safe and sound manner, provide fair access to financial services, treat customers fairly and comply with applicable laws and regulations. We had the opportunity to ask Otting five questions about his new position and the current state of financial services.
1. What are your general priorities as the 31st comptroller of the currency?
As comptroller, my priorities are to ensure the safety and soundness of or federal banking system, promote jobs and economic opportunity by reducing unnecessary regulatory burden, enhance the value of the federal charter and ensure that the OCC operates as effectively and efficiently as possible. We have a lot to do as a nation to focus on growth and opportunity. We need to do that in ways that keep the system safe and sound and treat customers fairly. We are already seeing the benefits of a changing tone in Washington and we’ll see more meaningful progress over the next year to 18 months as the regulatory leadership team is put in place.
2. What policies need revisiting?
There are three policy areas that need work in the near term. First, the Bank Secrecy Act. Banks and federal regulators are getting better at catching criminals who misuse the banking system. One of my priorities is to make the process as effective and efficient as possible. The laws and regulations around the Bank Secrecy Act and anti-money laundering are intended to protect our financial system from being misused for illegal purposes. But rather than serving that goal, our system has evolved into a series of “gotchas” and other unhelpful activities. We need a fresh approach. The OCC is just one agency in the mix. It acts like an umpire in baseball, but the rules are written by other agencies. To fix the system we will need a collective effort that involves lawmakers, the Treasury Department, the Financial Crimes Enforcement Network and other regulators. Congress has begun to reexamine the act to determine what can be improved and I am optimistic that we can make the system work better.
Second, we need to reexamine the Community Reinvestment Act (CRA). The original intent of it was to encourage banks to lend in their communities. I am a big supporter of this goal and the community groups who provide services in their communities, but today we have an incredibly complex process that has lost its way. After 40 years, we have a CRA regime that consumer groups don’t like, banks don’t like and, frankly, regulators don’t like. OCC ratings and decisions related to CRA need to be based on the actual record of how a bank meets the act’s obligations and serves the needs of its communities. We won’t tolerate groups that do not provide services to these communities to disrupt the process and affect our decisions. Banks will have the independence to determine what groups and activities they choose to partner with and invest in, and we encourage banks to ensure those investments make a difference in the communities they serve.
The third area is small-dollar lending. The byproduct of current regulation is that it’s very difficult to get a small-dollar loan at a bank, and most of this activity has been forced out of banking. My goal is to bring small-dollar loans back.
3. Do you consider the Community Reinvestment Act to be outdated?
CRA is 40 years old and after four decades we need to revisit whether we are still achieving our original goal of encouraging banks to meet the credit needs of their communities. We need to simplify and expand what activities qualify for CRA credit, we have to stop holding banks and business development hostage through the CRA process and we need to modernize how we think about service areas. Today, it is much too easy for a bank to earn a satisfactory rating in this area and almost impossible to earn an outstanding rating. Let’s fix that so that banks are encouraged to help keep communities and neighborhoods vibrant and get appropriate credit for doing so. OCC ratings and decisions related to CRA need to be based on the actual record of how a bank meets its CRA obligations.
4. What do you see as the major challenges for banking in the months ahead?
The federal banking system is safe and sound today. The industry understands its risks better than ever, and bankers have done a great job of taking on higher quality lending. Capital and liquidity are good. When we talk about challenges, credit quality is always a driver and we are seeing a pattern of weaker underwriting and additional risk accumulating at this point in the cycle. The worst loans are made in the best of times. We also have to look closely at cybersecurity, which is front of mind for bank executives and regulators.
We also need to watch the effect of rising interest rates on the balance sheets of these institutions after such a long period of historic interest rates.
5. What do you see as the path forward for community banking?
Small, local banks remain the heart of their communities and we need to ensure that they remain part of the broader banking landscape in the future. To do this, we need greater flexibility to tailor regulatory requirements for community banks that do not pose the same risks as their larger counterparts. I think we’re seeing momentum in Washington to make meaningful progress to reduce the regulatory burden on these banks.
One way to move forward is to return to a simpler capital structure for small banks. I’ve been a banker for more than 30 years and I need expert help to fully understand the requirements from time to time. We should not put that kind of burden on smaller banks that do not pose a threat to our financial system.
We also need to be mindful of the burden of regulatory compliance on community banks and bring a more common sense approach to our assessment.
Aside from burdensome regulation, the community banks also need a clearer path to take advantage of business opportunities. For instance, there are areas of small consumer lending in banking that should be thought through to allow banks to participate in that space. Banks have to understand the rules in the new technology environment and they need to have the opportunity to use those rules to fill market needs.
Published in Bankers Digest March 5, 2018