New York battles ‘regulator switch’ by Tokyo bank

Bloomberg

New York isn’t going to let Bank of Tokyo-Mitsubishi UFJ Ltd. slip out of its regulatory oversight without fighting back. The state’s banking regulator, Maria Vullo, said in a legal filing that the Tokyo lender’s request last year to shift regulators — trading its state license for a federal one — was granted arbitrarily and unlawfully. Accusing the bank of trying to avoid the consequences of its misconduct in New York, she asked a federal judge in Manhattan to allow the agency to fine the Tokyo lender for recent compliance violations.
The judge’s response will be watched closely by leaders of global banks, not least those that have smarted at the billions of dollars of fines issued in recent years by the New York Department of Financial Services, which Vullo now runs. At least one chief executive officer of a European bank overseen by the DFS has talked with his executive team about switching to federal oversight given the harsh penalties imposed by the New York regulator, according a person with knowledge of the discussions. “The financial industry has generally deemed the settlements demanded by DFS in recent years to be arbitrary and larger than warranted,” said Kathryn Wylde, president of the Partnership for New York City, which represents the city’s business interests. “It is understandable that institutions might want to see if they fare better with a federal regulator.”
Bank of Tokyo-Mitsubishi UFJ made its shift last year, applying to come under the OCC’s oversight and receiving its approval eight days later. The Tokyo lender then sued DFS in an attempt to halt the New York regulator’s oversight activities.
In her filing in that matter, Vullo challenged the legality of the conversion, which she said was sealed before DFS had weighed in on the matter. The OCC licenses are “contrary to law, invalid and not effective, as they were issued pursuant to federal agency action that was arbitrary and capricious, an abuse of discretion, and not in accordance with law,” she argued.
While Vullo doesn’t have the scope within the current legal battle to seek to reverse the bank’s regulatory switch, a favorable decision by the judge could lend legitimacy to her position and send a warning to banks hoping to secure a similarly swift approval.

COMPLIANCE EFFORTS
“No bank or financial institution should be permitted to avoid responsibility for its prior illegal conduct by blithely trading enforcement regimes through a conversion from a state-licensed entity to a federally licensed entity,” Vullo wrote. “Even were this kind of regulatory arbitrage acceptable going forward (and it is not), it cannot and does not erase the misdeeds of the past indisputably committed under a New York license.”
Vullo described Bank of Tokyo-Mitsubishi UFJ as negligent in its compliance efforts and said the bank lied to the independent consultant that DFS assigned to monitor its compliance programs. The bank also impeded the consultant’s work by firing the chief compliance officer of its New York office, who was cooperating fully with the consultant, she wrote. She asked for permission to impose a monetary penalty on the bank, without specifying an amount. Kazunobu Takahara, a spokesman for Mitsubishi UFJ Financial Group Inc., the bank’s parent, declined to comment.
Bryan Hubbard, an OCC spokesman, said the office isn’t named in the litigation. The license the OCC granted to the lender was “fully in accordance with applicable legal standards and agency policies,” he said, adding that as part of the conversion to federal regulation the bank and the OCC entered into consent orders “that are substantively the same” as those the bank had struck with
the DFS.