Plan to prevent banks from seducing regulators scrapped

Bloomberg

A high-profile plan to prevent federal watchdogs from getting too cozy with banks they are supposed to police has been scrapped by President Donald Trump’s newest Wall Street regulator.
For years, the Office of the Comptroller of the Currency intended to remove hundreds of examiners who work inside the offices of JPMorgan Chase & Co., Citigroup Inc. and other lenders. In just his second week on the job, OCC chief Joseph Otting nixed the effort. “Upon review, it is not practical to continue the agency’s efforts to move resident examiners out of on-site locations,” Otting, a former banker, said in a statement to Bloomberg News.
Other reforms, such as regularly rotating supervisors from bank to bank so they don’t spend too long in a particular firm, show the OCC has taken steps to prevent “regulatory capture,” said Otting, who ran OneWest Bank Group when Treasury Secretary Steven Mnuchin was the lender’s chairman. Factors cited as contributing to the OCC maintaining the status quo include the high cost of Manhattan real estate and the burden examiners would face in slogging back and forth between government offices and Wall Street banks.
The move is the latest example of how regulators under Trump are quietly rethinking Wall Street oversight even if they’ve made little progress so far easing rules passed in the wake of the 2008 financial crisis. Pulling embedded examiners out of big banks had been considered a key initiative to ensure supervisors didn’t develop a form of Stockholm Syndrome that kept them from aggressively looking out for abuses.
The supervisors employed by the OCC and the Federal Reserve Bank of New York are akin to cops walking the beat, because they are tasked with the crucial job of making sure banks follow the rules and don’t take undue risks. The agencies have special office space in each lender’s building, with their supervisors largely quarantined from casual interactions with bankers. At the OCC, the regul-
ator of national banks, Otting is halting something that hasn’t happened yet. About 65 percent of its large-bank examination force remains on-site, the same as two years ago, according to the regulator. And the number of embedded supervisors has actually risen to 517 from 430 in 2015.
The controversy over in-house watchdogs came to a head in 2012 when Carmen Segarra, a former senior examiner of Goldman Sachs Group Inc. at the New York Fed, claimed she was fired for refusing to withdraw negative findings about the bank. While a lawsuit she filed against the New York Fed was eventually dismissed, her complaints and recordings she’d made of Fed meetings triggered lawmaker demands for increased examiner independence. The issue gained more attention in 2015 because of an embarrassing situation in which a Goldman Sachs banker pleaded guilty to accepting stolen documents from a friend who worked at the New York Fed.
Former Comptroller of the Currency Thomas Curry, a Barack Obama appointee, spearheaded the OCC’s effort to remove embedded supervisors. His plan focused on leaving a small number in place, while shifting the rest to regional teams that could focus on dangers that cut across multiple banks.
The NY Fed started a similar effort years ago to ship most of its 200 in-house examiners to its downtown offices. So far, only a small number of people have moved, according to a person with knowledge of the process who asked not to be named because the agency hasn’t publicly laid out the details of its plan. The Fed still intends to relocate employees, the person said.