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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.

Barbara A. Rehm

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.

"I want the banking system to be valued again and to be recognized that it is a key component to growth," he says. "Also, the supervision of the large banks has to be trusted again."

To do that he's turned the large-bank supervision model inside out. Rather than putting the primary focus on credit, liquidity, interest rate and price risk, Brosnan has the OCC's large-bank examiners targeting operational, compliance, strategic and reputation risks.

"For the first time in my life, we actually say this basket of risks is more important, and more of a priority for the system to deal with, than" asset quality, liquidity, interest rate risk and trading activities.

"It's weird," he admits. "It makes us uncomfortable as examiners, because it's not how we were trained."

Brosnan is an even tougher grader when it comes to his own team. He gave most banks a C-plus or B-minus but gave the Comptroller's Office only a C.

"Fixing capital, reserves and liquidity is much easier than what we're fixing now, which is governance and oversight," he said.

Among the five governance areas being targeted, risk management and audit are getting the harshest eye. "We determined that for these 19 banks, their audit and risk management functions had to be elevated from wherever they were to meet our definition of 'strong,' " Brosnan says.

None of the banks have met that standard for audit; 10 banks are within a year of meeting it while the nine remaining banks will need up to two more years, according to the materials the OCC disseminated at the conference. (The OCC did not identify any of the banks by name.)

None of the banks have met the risk management standards either. Four are within a year and 15 of the banks are going to need up to two years to pull their systems up to snuff, the OCC says.

The OCC also wants bank boards of directors to provide a "credible challenge" to senior management.

"Providing credible challenge means you are informed, and that you also realize you have a fiduciary duty to the community and the employees," Brosnan says. "If they are just going to say 'yes,' then they have failed. They have to be informed, invest the time and then ask the right questions."


(10) Comments



Comments (10)
The HSBC settlement highlights that money laundering is only a fraction of the real problem. US Senate investigators found that senior management considered that the bank's business interests were trumping its compliance obligations. In other words, HSBC was run by folks who felt their business was more important than regulations. Even record fines won't change such a mindset. That type of thinking at government-insured institutions requires prosecution, conviction and incarceration of specific individuals, starting with the CEOs.
Posted by jim_wells | Monday, December 17 2012 at 12:45PM ET
In India position is more alarming.I experience executives like General Manager make misleading statements.Give misleading information.I am following-up these matters with the related banks
Posted by arun kottur | Sunday, December 16 2012 at 11:29PM ET
It is even worse when you consider these are the mandatory subjects according to Basel.
What about the governance topics a professional organisation should implement themselves, because they want to become the best in the marketplace. Governance and people 'our greatest assets' are the words that a lot of boards easier say then practise.
Posted by PieterSpringer | Saturday, December 15 2012 at 8:09AM ET
Imagine the surprise of the CEOs of the Too Big To Behave Banks when the friendliest of federal bank regulators suddenly applied a real test of their management and graded it on actual performance rather than some concocted perception, as the OCC continues to do with CRA.
Posted by jim_wells | Friday, December 14 2012 at 4:35PM ET
"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."

Why would you be surprised by this? The OCC has been known to be the light-weight regulator for years. That's why so many banks became national. Now, they are trying to live up to a tough guy image or become obsolete, so of course they are going to come in and stick it to banks. So throw one more regulator in with the pile and let them all have a contest to see who is the toughest. I'm sure that will help free up lending for the masses.
Posted by BankerBud | Thursday, December 13 2012 at 11:27AM ET
Who is running US largest banks? They need to be told, reminded and required by regulators about internal auditing, risk management and succession planning- about motherhood and apple pie? What are the bank leadership and management there for? They instead run Congress, as some said. What a role reversal? Sad but true, this would be no way building reputation for either or serving the respective constituencies.
Posted by Center for Safe and Sound Banking | Thursday, December 13 2012 at 11:25AM ET
Another cogent argument for breaking up the 19 largest TBTF banks. They have the majority of the assets and the majority of risks. The gun is still pointed at our heads. Wake up folks, it ain't free market capitalism. They screw up we pay. Plain and simple. More regulation is NOT the solution.
Posted by TxTim | Thursday, December 13 2012 at 9:20AM ET
If those were the results at my Bank,we would be placed under LOA,given higher Capital directive and if not corrected in 24 months,be assessed a CMP.
What will happen to these Banks when they don't or won't comply?
Posted by mainstreetbanker | Thursday, December 13 2012 at 8:46AM ET
I am sorry but if the US and its regulators had actually read the Basel II Accord they would not be so shocked about risks like reputation risk, strategic risk. These are what is known as Pillar II risk and have always been considered the key risks. I am amazed that this is news to veteran regulators. No wonder the epicentre of the crisis was the US
Posted by mackalyan | Thursday, December 13 2012 at 6:41AM ET
I think after the 2008 crisis, national banks are being held to higher and tighter standards than ever before.
Posted by http://howtogetoutofcreditcarddebts.com | Thursday, December 13 2012 at 6:31AM ET
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