The OCC Carefully Studies How to Fail

Posted on May 29, 2014 by William Black

The reason we have recurrent, intensifying financial crises is because we learn the wrong lessons from our prior crises and actively make things worse. The consistent explanation for our making things worse is that dogmas lead to “doubling down” on failed faith-based policies. The dominant ideologues in the U.S. and Europe on financial policies are theoclassical economists and their fellow choir members – neoclassical economists. A small article in the Wall Street Journal provides a classic example of the continuing destruction driven by these dogmas.

The WSJ article, of course, sees none of this. It fails to distinguish between two very different concepts. The Office of the Comptroller of the Currency (OCC) is supposed to regulate “national banks” – the largest banks. The first concept is where examiners’ offices are located. The OCC uses “resident” examiners in the largest banks. This means that hundreds of OCC (and Fed) examiners have offices in the huge banks. Resident examiners are a terrible idea because they invariably “marry the natives.” When the Fed “marries the natives” it constitutes incest because the NY Fed (which examines many of the largest bank holding companies) has traditionally been one branch of the inbred Wall Street family. The OCC, under Presidents Clinton and Bush, was nearly as bad because it was engaged in a “race to the bottom” with the Office of Thrift Supervision (OTS) to see which could “triumph” as the worst federal banking regulator.

If the OCC proposal was to cut back dramatically on resident examiners in order to beef up normal examination frequency and scope that would a very good thing that we could applaud. That would be the obvious fix that any effective supervisor would have implemented as soon as he or she was appointed. This is the second concept that the OCC could have meant by its proposal. It does not appear that the second concept is what the OCC’s leadership has in mind. Their system has increasingly deemphasized examination in favor of off-site monitoring (analysts in government office buildings looking at their computers). The OCC has not announced that it adopting an increase in examination frequency or the scope of examinations as a result of its decision to reduce the number of resident examiners.

We Know How to Make Examination and Supervision Succeed

In a normal examination the examiners’ offices are located in a federal building but the examination takes place in the bank’s offices. These examinations are our paramount function as banking regulators. In a well-functioning regulatory agency everyone adds value, but none of us can succeed if the examiners fail. During the S&L debacle, the reason we were able to reregulate successfully, to bring thousands of successful enforcement actions, and hundreds of civil actions, and to make it possible for the Department of Justice to obtain over 1,000 felony convictions in cases it designated as “major” was the examiners’ success. George Akerlof and Paul Romer recognized this point.

in full: http://neweconomicperspectives.org/2014/05/occ-carefully-studies-fail.html