June 14, 2018

Senate Banking, Housing, and Urban Affairs Committee “Update from the Comptroller of the Currency”

Key Topics & Takeaways

  • Review of Banking Practices: Several Members of Congress inquired about the OCC’s horizontal review of banking sales practices and their findings and whether they would be made public. Otting explained that the review finished at the end of 2017, had over 40 national banks included and focused on new accounts that were opened without customer consent over a three-year period. He continued that of the 500-600 million accounts reviewed, 20,000 were flagged, with half of those accounts being opened inappropriately and the others missing the documentation required to open accounts. Regarding releasing the findings, Otting stated that the report contains confidential information and he would not commit to releasing it. 
  • Stress Tests: Chairman Mike Crapo (R-Ind.) asked if the OCC would be providing guidance to the financial industry on how S.2155 will impact stress tests, specifically for those companies with total assets less than $100 billion. Otting replied that the OCC created a “critical path” document and that resources at the agency have been allocated, as well as interagency working groups created for interagency activities.
  • Volcker Rule: Sen. Thom Tillis (R-N.C.) asked why the OCC opposes having a single regulator (the Fed) for overseeing Volcker Rule compliance and implementation, to which Otting replied that the OCC should have a voice in any final ruling due to 45 percent of Volcker activities happening in banks and 55 percent happening at the holding company. Tillis then asked how the proposed Volcker changes will impact the industry, and Otting stated that they will bring clarity to banks and examiners, specifically with proprietary trading, and added that excluding those with $10 billion or less “was a good solution.”

Witness

Opening Statements

Chairman Mike Crapo (R-Idaho), Senate Banking Committee

In his opening statement, Crapo noted the recent Volcker Rule proposal made with four other regulators and described some of the other recent actions made by the Office of the Comptroller of the Currency (OCC), to include modifying and modernizing the application of the Community Reinvestment Act (CRA), reviewing compliance with anti-money laundering (AML) laws. He continued that the OCC will have to provide guidance in implementing S.2155 in areas such as the community bank leverage ratio, reducing exam cycles and reporting requirements for small banks, and removing central bank deposits from the denominator of the supplemental leverage ratio (SLR) for certain banks.

Ranking Member Sherrod Brown (D-Ohio), Senate Banking Committee

In his opening statement, Brown criticized Otting for threatening the progress of the financial system since he took office, stressing that the OCC is supposed to be a “watchdog” over the largest banks, questioning the OCC’s decision to have bank examiners work out of the banks rather than the OCC. He then focused on the OCC’s plans to change the CRA, leaving members of the committee and the civil rights community “deeply concern[ed].”

Testimony

The Honorable Joseph M. Otting, Comptroller, Office of the Comptroller of the Currency

In his testimony, Otting outlined a set of goals and objectives to reduce the regulatory burden and ensure economic growth while maintaining the safety of financial institutions. Otting noted that the OCC is unique in that it is the sole regulator dedicated to prudential supervision, overseeing small community banks and the largest, most globally active banks in the country. Otting listed his three major priorities since his appointment in November: 1) the modernization of the CRA, 2) the encouragement of banks to meet “short-term, small dollar credit needs” for the consumer, and 3) enhancing Bank Security Act (BSA) anti-money laundering (AML) compliance. Otting then acknowledged additional objectives, including the simplification of regulatory capital requirements, recalibration of the Volcker rule, and ensuring that the OCC works efficiently and in the interest of the consumer. Otting underscored the role that the OCC plays in maintaining a safe and efficient financial system and preventing consumer abuse.

Question & Answer

Horizontal Review of Banking Practices

Several Members of Congress inquired about the OCC’s horizontal review of banking sales practices and their findings and whether they would be made public. Otting explained that the review finished at the end of 2017, had over 40 national banks included and focused on new accounts that were opened without customer consent over a three-year period. He continued that of the 500-600 million accounts reviewed, 20,000 were flagged, with half of those accounts being opened inappropriately and the others missing the documentation required to open accounts. Regarding releasing the findings, Otting stated that the report contains confidential information and would not commit to releasing it.

Stress Tests

Crapo asked if the OCC would be providing guidance to the financial industry on how S.2155 will impact stress tests, specifically for those companies with total assets less than $100 billion. Otting replied that the OCC created a “critical path” document and that resources at the agency have been allocated, as well as interagency working groups created for interagency activities. 

Community Reinvestment Act
Democrats focused on the modernization of the CRA and asked Otting why the public should trust him to appropriately update it if he is not familiar with the discrimination practices taking place. Otting replied that he is “all about expanding CRA” and that two of his top three agenda items (from his testimony) go “right to the core of the people in America that need the most help.”

Brown specifically asked Otting to promise to only move forward with CRA overhaul if the civil rights community fully supports the changes, to which Otting replied that they will have the ability to provide comments through the Advanced Notice of Proposed Rulemaking (ANPR), and that they will also be seated at the table for discussions on the topic.

Sen. Brian Schatz (D-Hawaii) questioned the OCC’s change in evaluating banks’ performance under the CRA, as lending practices will no longer impact the CRA score if discrimination is not related to CRA lending, to which Otting replied that he does not believe evidence of discrimination will be ignored when determining a CRA rating.

Volcker Rule

Sen. Thom Tillis (R-N.C.) asked why the OCC opposes having a single regulator (the Fed) for overseeing Volcker Rule compliance and implementation, to which Otting replied that the OCC should have a voice in any final ruling due to 45 percent of Volcker activities happening in banks and 55 percent happening at the holding company. Tillis then asked how the proposed Volcker changes will impact the industry, and Otting stated that they will bring clarity to banks and examiners, specifically with proprietary trading, and added that excluding those with $10 billion or less “was a good solution.”

Crapo asked for Otting’s commitment to carefully review all comments received on the Volcker proposal and to adjust where necessary to address issues raised. Otting replied that the big challenge is examining proprietary trading, but that there is a “solution to build on in years to come.” He added that they will look at the impact of eliminating covered funds in the long run to see if a source of capital is needed to help small businesses.

Deregulation and Weakening Regulation

Brown opined that Otting believes the banks “have had it tough” and need deregulation, to which Otting replied that while he is comfortable with the regulatory framework, there are certain areas that should be re-examined and removed if they do not impact safety and soundness. He gave the example of the BSA process and how he wants to focus on finding a simpler way to find bad actors.

Brown then questioned the OCC signing onto a rule that weakens capital requirements for the eight largest banks by $120 billion, noting that the Federal Deposit Insurance Corporation (FDIC) did not sign on to the rule, and asked if he has financial stability risk concerns over such a change. Otting replied that the rule is out for public comment and that it will be changed as needed based on feedback, but that the leverage ratio treats all risk equally and can possibly force banks into a higher risk issue at the expense of a lower risk issue.

Examiner Locations
Brown and Sen. Chris Van Hollen (D-Md.) asked why the OCC has examiners located in banks, to which Otting replied that while some mid-size banks have onsite examiners, all the large banks have examiners onsite, with 5-year rotations, and that having them there gives them the “ears and eyes” in overseeing day-to-day activities, working to the OCC’s benefit.

Bank Holding Companies
Crapo noted that some national banks are eliminating their holding companies and that while the dissolution process is fairly straightforward, he asked how Congress or regulators could address some of the challenges involved. Otting noted the increase in bank consolidating activities from the holding company into the bank, and that while the OCC has authority in this area, legislative action could make the process easier in the future.

For more information on this hearing, please click here.