WASHINGTON The Office of the Comptroller of the Currency has been tightening its supervision of the largest banks and apparently that upgrade comes with a price.
The agency said Monday it plans to increase examination fees for the first time in nearly 20 years for institutions with over $40 billion in assets, a step the agency says is necessary because of its expanded role under the Dodd-Frank Act. Among other things, the law required the OCC to assume supervision of federal thrifts.
Signs of a more robust OCC seem to be everywhere. Following high-profile fiascoes such as anti-money laundering problems at big banks and the "London Whale" trading mess at JPMorgan Chase the agency has taken a stronger stance on how it monitors AML activities and formalized its "heightened expectations" program to more aggressively supervise big banks' risk management programs.
Observers say it makes sense for the agency to conclude it needs more funding to carry out its responsibilities. Under the new proposed fee plan, which banks have until June 12 to comment on, institutions with over $40 billion in assets would be subject to a 14.5% marginal rate hike starting at the end of September. On average, banks and thrifts covered by the rule change would see an average assessment increase of 12%.
"If examiners are actually going to go in and deconstruct transactions, then that is going to cost a lot more than just determining if the right policies, procedures and review committees are in place," said Arthur Wilmarth, a law professor at George Washington University.
The agency said the proposed assessment hike in examination fees "reflects new supervisory and regulatory initiatives." Overall, the OCC said the proposal would increase the agency's assessment revenue by between 7% and 7.5%.
"Since the enactment of the Dodd-Frank Act, the OCC's responsibilities have expanded and changed in several important ways," the agency said in the proposal, which was published in the Federal Register. "These include taking on responsibility for the supervision of [federal savings associations] and the need to devote appropriate resources to the implementation of the Dodd-Frank Act and supervising compliance with its requirements."
In addition to added duties in the post-Dodd-Frank era, the OCC said the proposed fee hike also stems from the fact that there had not been an increase in marginal assessment rates for institutions above $40 billion in assets between 1995 and 2013. Those rates were even lowered in 2008.
"In recent years, marginal assessment rates for most national banks were relatively stable, which in part reflected a stable regulatory landscape," the OCC said.
Yet the actual increase in fees would likely vary significantly among institutions of differing asset classes. The hike in assessments would range from 0.32% to 14%, depending on the size of the institution. That means some rate jumps would be quite small.
For example, in a chart accompanying the proposal showing hypothetical fee comparisons, the OCC said an institution with $41 billion would pay only $4,800 more, or 0.20%. By contrast, the fee for a bank with $1 trillion in assets would increase 13.48% to $38.5 million, while the fee for a bank with $2 trillion in assets would increase $13.98% to $76 million.
"We expect the effect on the twenty-five institutions with more than $40 billion in total assets to be nominal," the proposal said, adding, "Most banks and" thrifts "have assets of $40 billion or less and would not be affected by the increase."
The agency went on to say it believed a hike on fees paid by community banks would be unjustified.
"A rate increase would strain the limited resources of community banks and FSAs and would be unwarranted for these smaller institutions, in light of the fact that the bulk of the OCC's new responsibilities are directed toward large institutions," the agency said. "For these reasons, the OCC has determined that it is not appropriate to raise marginal assessments for community banks and FSAs."
Sanford Brown, a partner at Bracewell & Giuliani in Dallas, noted that the agency does not receive congressional funding.
"The OCC's workload for the largest banks in the country has increased significantly as a result of Dodd-Frank. It only seems fair that those banks should bear a proportionate share of the increased costs associated with Dodd-Frank," he said. "The OCC is an unappropriated agency and so they get their revenue from the national banking industry and federal thrifts, not state banks and not bank holding companies."
But others said the fee change prompts questions about whether institutions of other charter classes could see increases from their regulators too as a result of heightened supervision.
"I wonder how this will be balanced out with respect to state banks and holding companies," said Ronald Glancz, a partner at Venable LLP.
Wilmarth said the proposed funding increase likely results from industry trends that predated Dodd-Frank. Consolidation and the massive growth in the largest banks led to a level of complexity and sophistication that regulators have at times struggled to keep up with in terms of monitoring, he said.
"The London Whale episode was a further wake-up call. The OCC is realizing that these banks are very challenging and difficult to regulate," he said. "Dodd-Frank is simply trying to play catchup with what is occurring in the industry."