From the U.S. Government Accountability Office, www.gao.gov Transcript for: Banks and Regulatory Capture Description: How can federal regulators reduce the risk of benefitting the banking industry at the expense of the public interest? Related GAO Work: GAO-19-69: Large Bank Supervision: OCC Could Better Address Risk of Regulatory Capture Released: February 2019 [ Background Music ] [ Mike Clements: ] There has been research showing a relationship between regulatory capture and weaknesses in federal oversight. [ Matt Oldham: ] Welcome to GAO's Watchdog Report. Your source for news and information from the US Government Accountability Office. I'm Matt Oldham. The Office of the Comptroller of the Currency is one of America's banking regulators, supervising more than 1300 financial institutions. And as a regulator, there is concern about the potential for regulatory capture—a possible factor in the financial crisis that began in 2007. I'm with Mike Clements, a Financial Markets and Community Investment director at GAO, and he led a report looking at how the OCC handles the risk of regulatory capture. Mike, for starters, could you explain this concept in simple terms? [ Mike Clements: ] Matt, maybe the first place to start is really look at the purpose of regulation. Regulation exists to help mitigate market failures and ensure compliance with laws and regulations, unless there's a public interest benefit to regulation. Regulatory capture occurs when the regulator, rather than focusing on that public interest, actually acts in the interest of the institution that is regulating. As you mentioned, we looked at the banking regulatory space. And in that space, regulatory capture would occur when the banking regulator is actually acting in the interest of the banks its regulating rather than the public. [ Matt Oldham: ] So, what could happen if we don't defend against regulatory capture? [ Mike Clements: ] If we think about banking regulators, they supervise banks really in two spaces. First, for safety and soundness to ensure that we don't have bank failures or a systemic bank failure as we -- occurred in the 2007/2009 financial crisis. They also supervise banks for compliance with banking and consumer laws and regulations such as fair lending, anti-money laundering. So, regulatory capture in this environment would occur if that banking regulator is not taking timely and sufficient action to ensure those concerns are not addressed. [ Matt Oldham: ] And we've seen examples of this in the past? [ Mike Clements: ] Yes. So, if you think back to the financial crisis of 2007/2009, one of the contributing factors to that was weaknesses in federal banking regulators. And there has been research showing a relationship between regulatory capture and weaknesses in federal oversight. Another example would be the New York Federal Reserve Bank conducted a lessons learned study of the financial crisis, and the lead off of there noted that the Federal Reserve Bank of New York was not strictly enforcing regulatory requirements because of deference to the firms. [ Background Music ] [ Matt Oldham: ] So it sounds like regulatory capture could be harmful because it places private interests over the public interest. And if it happens in the banking sector, we could possibly see harm to the economy similar to the financial crisis of a decade ago. So Mike, what does your team recommend for the OCC? [ Mike Clements: ] We made a number of recommendations to OCC. We have recommendations in this area of the supervisory process, basically in asking the agency to increase transparency and accountability of its decision-making processes. We have a recommendation looking at agency-wide efforts to mitigate regulatory capture in the agency's enterprise risk management framework. We also had recommendations for individual conflicts of interest to ensure that employees maintain their independence. [ Matt Oldham: ] So finally, what do you believe is the bottom line of this report? [ Mike Clements: ] The banking sector is critical for the economy, as you mention. It's viewed as the circulatory system moving capital around. And therefore, banking oversight is essential in this environment. Regulatory capture is a real risk and we're looking for agencies, including OCC to have policies and procedures in place to help mitigate those risks. [ Matt Oldham: ] Mike Clements is a Financial Markets and Community Investment director at GAO, and we were talking about his report on the OCC's approach to defending against regulatory capture. Thank you for your time, Mike. [ Mike Clements: ] Thank you. [ Background Music ] [ Matt Oldham: ] And thank you for listening to the Watchdog Report. To hear more podcasts, subscribe to us on Apple Podcasts. [ Background Music ] [ Matt Oldham: ] For more from the congressional watchdog, the U.S. Government Accountability Office, visit us as gao.gov.