PNC CEO: 'Regulation is uneven' between OCC, other agencies

PNC Financial Services Group CEO Bill Demchak said the bank failures that rocked the industry last spring would not have happened at institutions if they had been regulated by the Office of the Comptroller of the Currency.

"Regulatory arbitrage" is leading to banks across the country being held to different standards, Demchak said at a Tuesday event hosted by Brookings about last year's bank collapses. He said that institutions can "charter shop" to find softer regulators, like the Federal Deposit Insurance Corp. and the Federal Reserve Bank of San Francisco, the respective supervisors of the failed First Republic Bank and Silicon Valley Bank.

"My primary lesson learned was that regulation is uneven," Demchak said. "It astounded me what First Republic and Silicon Valley were able to do…Regulators didn't do their job…Bluntly, if that was an OCC bank, that never would have happened."

First Republic and SVB collapsed last spring under pressure from a confluence of deposit runs, industry concentrations and underwater investments.

Demchak said that while executive management of the banks was ineffective, regulators should have seen obvious warning signs. SVB's bond portfolio, which the bank ultimately sold at a $1.8 billion loss due to interest rate increases, should have been a "red flag" to supervisors, he added.

The struggles of New York Community Bancorp, whose stock price has tumbled nearly 70% since the start of the year, is another example of inconsistent supervision, Demchak said. As part of the Long Island bank's acquisition of Flagstar Bancorp in 2022, it converted to a national bank, meaning its lead federal regulator became the OCC instead of the FDIC. The combined bank later surpassed $100 billion of assets, triggering more stringent regulatory requirements set for bigger banks.The additional scrutiny by the OCC reportedly teed off its recent pains, which Demchak said was "telling."

Travis Lan, deputy chief financial officer at New Jersey-based Valley National Bancorp, told American Banker last month that being under the OCC's supervision helps his bank's risk profile.

"The OCC has been our regulator for, I think, as long as anyone here can remember," Lan said. "There is a different level of scrutiny that comes with that."

Aaron Klein, senior fellow in economic studies at Brookings, said in an interview after the event that Demchak's criticism of the failed banks' supervisors was fair. Klein believes SVB's former president and CEO Greg Becker's seat on the board of the San Francisco Fed played "a massive role in the regulatory and supervisory neglect that ultimately led to SVB's failure."

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However, Klein disagreed that the OCC is necessarily a tougher regulator for all institutions. He said that the agency can be tough on large banks, but it can have a blind spot when it comes to smaller banks that are reliant on overdraft fees.

Rep. Patrick McHenry, R-N.C., during a fireside chat at the same Brookings event, said that there needs to be a review of the bank supervision system to ensure that institutions across size and scope are monitored appropriately and consistently.

"We have this competing set of regulators to do, in essence, the same thing and one consistently has failures," McHenry said. "We've got to review that and make sure that you actually have consistent regulation of our banking industry, so we don't have a barbell banking system."

Klein added in an interview that just because two banks are similar in size, it doesn't mean they should be classified the same way. He added that last spring's failures weren't due to problems across regional banks. SVB and First Republic, which both had more than $200 billion in assets before failing, focused on specific sectors, keeping an outsized amount of uninsured deposits and staying in a narrow geographic range.

"PNC's business model has nothing in common with SVB's," Klein said "One of the failures in banking nomenclature is we tend to group banks by size, not by business model…Regional banks that bank people and communities were not the problem."