Big Banks Flunk OCC Risk Tests

Think corporate governance at the largest banks is weak? You're right, but you probably have no idea just how right you are.

The Office of the Comptroller of the Currency recently graded the 19 largest national banks on five factors designed to gauge how well they are being run.

The results are startling.

Not a single bank met the OCC's requirements for internal auditing, risk management or succession planning. Only two of the 19 banks met the regulator's requirements for defining the company's appetite for risk-taking and communicating it across the company. Only two banks were judged to have boards of directors willing to stand up to their CEOs.

This miserable picture was painted by OCC leaders last month at a closed-door conference for large-bank directors. I obtained a copy of the presentation materials and I asked the OCC to help me understand them.

In an interview Monday, Mike Brosnan, an agency veteran who now leads large-bank supervision, walked me through the progress bankers and examiners alike have made over the last two years. He is confident that the next year will bring marked improvement.

"I'm satisfied with where they have come from, and I like the momentum," Brosnan says. "I think we're at a C-plus/B-minus point, and what we are looking to get to is B-plus or A-minus. We are not looking for A-plus."

Brosnan predicted each of the 19 banks will meet the agency's thresholds in at least one of the five categories by July.

"All these are motherhood and apple pie, but they are really hard to do," he says.

Hard indeed. According to the conference materials, the number of outstanding "matters requiring attention" at the 19 banks stood at 1,083 on Sept. 30, which works out to an average of 57 separate problems cited at each bank.

Brosnan stressed that national banks are being held to higher and tighter standards than ever before. "We've raised the bar significantly."

After the 2008 crisis, Brosnan and his colleagues at the OCC did some serious soul searching and concluded that the same mistakes that have bedeviled banks for decades did them in again: lousy loan underwriting, overleveraging, rapid growth and asset concentrations. Brosnan also faults the regulators, including himself, for missing the obvious.

"We don't have anything to hide behind. This is all fundamental stuff," he says. "Let's not kid ourselves. We got beat the old-fashioned way."

Determined not to get beat again, Brosnan's mission is nothing if not bold. He wants to restore the industry's — and the OCC's — reputation.