As President Biden settles into the White House, now seems like a good opportunity to provide his Administration some perspectives on how bank supervision looks from the trenches, through the eyes of community and regional banks. Those institutions have witnessed some helpful improvements over the last few years, but there is more to be done.
President Biden is likely hearing from some advisors that all Trump-era regulatory efforts should be reversed, which is understandable in light of the former president’s recent behavior. Although some Trump initiatives should be revisited, like the OCC’s “fair access” rule, many were intended to help rightsize and modernize our archaic banking system, without diluting safety and soundness or consumer compliance. What seemed particularly helpful was having key agency officials, themselves former bankers, convey to colleagues how supervision appears from the receiving end.
As for additional suggestions, let’s defer the big stuff for now, like consolidating agencies, and start with low-hanging fruit. These latter proposals don’t require new laws or regulations, just a shift in perspective among the agencies.
Respect. As their response to the pandemic made clear, most bankers are honorable men and women who strive to comply with complex rules, serve their communities, and provide value to their shareholders. Regulators should treat them accordingly. There is no doubt that examiners work under challenging and time-sensitive conditions. They nonetheless should conduct themselves as experienced professionals, able to conduct fair, transparent, and efficient examinations, without some of the inappropriate skepticism, and even personal attacks, that bankers have sometimes experienced.
Responsiveness. Ferris Bueller was right when he said, “Life moves pretty fast.” Bankers have important decisions to make under short timeframes. Those decisions involve different, and sometimes unclear, levels of necessary regulatory approval. Regulators are still not sufficiently sensitive to how quickly the private sector sometimes needs to act - and they continue to go dark when needed the most, like every December. To address this concern, the agencies can delegate more decisions to regional offices, ensure that they have a deep bench of accountable officials, and just be more responsive to the timing needs of the industry they regulate.
Realignment. Behind every bank regulation are decades of scattered interpretations, requiring the legal equivalent of Indiana Jones to uncover. If the agencies do not consolidate these interpretations, like the Federal Reserve accomplished with its affiliate transaction rules, they should at least create a hyperlinked annotated index to make them easier to navigate. If the agencies are too busy, they could enlist the aid of the American Bar Association’s Banking Law Committee, which I’m sure would lend a hand.
In addition to these general recommendations, here are a few specific ones:
UDAAP. Over the years, the agencies have defined unfair, deceptive, and abusive acts and practices incredibly broadly. They sometimes use the same supervisory tools against banks that commit innocent and isolated mistakes as they do against those institutions that systemically mistreat customers. If you only have a hammer, everything looks like a nail. The agencies should rethink their existing guidance so that they have a broader spectrum of available responses to alleged UDAAP situations, depending on each particular circumstance.
Fair Lending. Banks engage in so many transactions with so many customers, particularly in the most recent PPP wave, that there will inevitably be hotspots in their lending data involving protected classes. Unless regulators identify egregious conduct, they should give fair lending “warning tickets” to banks that may have statistical anomalies, but otherwise maintain an effective compliance program with a strong history of community engagement.
Banking agencies sometimes experience wide policy swings with each new Administration, and a new president can feel pressure to reject a predecessor’s entire agenda (especially this one), regardless of its merits. President Biden’s banking team will have a unique opportunity to build on existing regulatory innovation, and positively shift some supervisory attitudes, while avoiding consumer harm and maintaining the healthy banking system with which we are blessed.