Large Bank Supervision:

OCC Could Better Address Risk of Regulatory Capture

GAO-19-69: Published: Jan 24, 2019. Publicly Released: Feb 25, 2019.

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“Regulatory capture” is when regulators act in the interest of the industry they’re regulating, rather than in service of the public good. This can be a significant problem in banking regulation, where regulators may be swayed by future job offerings and more.

We looked at ways to reduce the risk of regulatory capture at the Office of the Comptroller of the Currency—which supervises the nation's largest banks—and found weaknesses. For example, when OCC selects a team to examine a bank, it does not have a policy to check data that could indicate conflicts of interest.

We made 9 recommendations to improve OCC's approach to regulatory capture.

 

Seal of the Office of the Comptroller of the Currency

Seal of the Office of the Comptroller of the Currency

Multimedia:

Additional Materials:

Contact:

Michael Clements
(202) 512-8678
clementsm@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

What GAO Found

Banking regulators such as the Office of the Comptroller of the Currency (OCC) can implement policies to address the risk of regulatory capture. The objectives of these policies include reducing the benefit to industry of capturing the supervisory process, reducing avenues of inducement offered by regulated banks, and promoting a culture that values independence (see figure).

Framework for Reducing Risk and Minimizing Consequences of Regulatory Capture

Framework for Reducing Risk and Minimizing Consequences of Regulatory Capture

OCC has some policies that encourage transparency and accountability in its large bank supervision processes; however, weaknesses in documentation requirements may make large bank supervision more vulnerable to regulatory capture. For example, examination teams are not required to document internal deliberations or communications with banks that lead to consequential decisions for a bank, such as supervisory or enforcement actions. Further, examination teams are required to delete drafts of key documents that memorialize reviews that are part of the supervisory process. Maintaining a complete and transparent record of decision making and important communication with banks could improve OCC's ability to mitigate capture-based decisions.

OCC also has some policies to mitigate conflicts of interest, but implementation is hindered by issues related to collection and use of data and lack of program assessments. For example, when staffing a bank examination team, OCC does not have a policy to verify that employees do not have active conflicts of interest by checking employee data. OCC also does not periodically assess the implementation of its ethics program, including policies and procedures intended to help the agency meet ethics laws and regulations. Improving data collection and assessing policies, controls, and guidance that identify and address conflicts of interest could help OCC ensure that its ethics program is operating effectively.

OCC leadership has taken some steps to demonstrate support for supervisory independence, but its approach to mitigating regulatory capture is narrow. For example, OCC only considers two factors when assessing the risk of capture: the tone of its media coverage and the extent to which examination staff rotate among banks. OCC does not analyze other relevant factors, such as employee movement to and from industry or its supervision practices, which can impact this risk. Without expanding its approach to addressing the risk of regulatory capture, OCC may be missing opportunities to identify other ways in which this enterprise-wide risk may affect the agency.

Why GAO Did This Study

OCC supervises over 1,300 financial institutions, with assets under supervision totaling $12 trillion. Weakness in supervision by federal regulators was among many factors that contributed to the 2007–2009 financial crisis, and some analyses have identified regulatory capture as one potential cause. Regulatory capture refers to a regulator acting in the interest of the regulated industry rather than in the public interest.

GAO was asked to review regulatory capture in financial regulation. This report examines the extent to which OCC (1) has policies that encourage transparency and accountability in the large bank supervision process, (2) has policies that address employees' conflicts of interest that could threaten their independence, and (3) promotes an agency-wide focus on supervisory independence and mitigating the risk of capture. GAO reviewed OCC policies, analyzed examination workpapers, and interviewed supervisory staff. GAO also analyzed conflict-of-interest data, as well as OCC's enterprise risk management framework.

What GAO Recommends

GAO is making nine recommendations to OCC related to managing the risk of regulatory capture, including improving the documentation of its supervision process, checking for conflicts of interest, periodically assessing the ethics program, and expanding its approach to addressing the risk of capture across the agency, among others. OCC agreed with one recommendation, disagreed with five, and neither agreed nor disagreed with three. GAO maintains that the recommendations are valid.

For more information, contact Michael Clements at (202) 512-8678 or clementsm@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: As of August 2019, OCC continued to disagree with GAO's recommendation and stated that it neither has taken nor plans to take any actions to address it. We maintain that consistently documenting internal deliberations that lead to consequential decisions for the bank could increase the transparency and accountability of examination teams' findings and decisions.

    Recommendation: The Senior Deputy Comptroller for Large Bank Supervision should revise Large Bank Supervisions policy to require documentation of examination teams internal deliberations that lead to consequential decisions for the bank, such as the decision whether to issue a Matter Requiring Attention, among others. (Recommendation 1)

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  2. Status: Open

    Comments: As of August 2019, OCC continued to disagree with GAO's recommendation and stated that it neither has taken nor plans to take any actions to address it. We maintain that revising the policy to ensure that drafts of key documents are not deleted will help OCC increase the transparency and accountability of the supervisory review process.

    Recommendation: The Senior Deputy Comptroller for Large Bank Supervision should revise Large Bank Supervisions policy to require that bank examination teams retain drafts of key documents, including the conclusion memorandum and supervisory letter, that record the supervisory review process. (Recommendation 2)

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  3. Status: Open

    Comments: As of August 2019, OCC continued to disagree with GAO's recommendation and stated that it neither has taken nor plans to take any actions to address it. We maintain that having meeting minutes and other documentation of key communications would provide OCC with a more complete and transparent record of the information banks provide to examiners and how that information impacts supervisory decisions.

    Recommendation: The Senior Deputy Comptroller for Large Bank Supervision should revise Large Bank Supervisions policy to require documentation of communications with banks, including those between executive and senior management and banks, that inform supervisory decisions. (Recommendation 3)

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  4. Status: Open

    Comments: As of August 2019, OCC continued to disagree with GAO's recommendation and stated that it neither has taken nor plans to take any actions to address it. We maintain that tracking and monitoring the use of informal recommendations could increase transparency of the supervisory process, which could help Large Bank Supervision mitigate the risk of regulatory capture.

    Recommendation: The Senior Deputy Comptroller for Large Bank Supervision should systematically track and monitor Large Bank Supervisions use of informal recommendations. (Recommendation 4)

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  5. Status: Open

    Comments: As of August 2019, OCC stated that it recognized and concurred with the value of documenting reasons for an adjustment to the scope of a recusal and the Acting Chief Counsel instructed all ethics officials to do so when reviewing financial disclosure forms. Further, OCC noted that the headquarters official reinforced this instruction in written guidance and training in January 2019. In addition, OCC stated that in June 2019, it added a new function to its Ethics Management System so that waiver determinations can be documented separately from recusals. We will continue to monitor OCC's progress in implementing our recommendation.

    Recommendation: The Chief Counsel should require that staff who review and record employees conflict-of-interest information (1) consistently record explanations of changes to scopes of recusals and (2) record waivers of Treasurys supplemental standards separately from recusals. (Recommendation 5)

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  6. Status: Open

    Comments: As of August 2019, OCC continued to disagree with GAO's recommendation and does not plan to develop a policy to check if employees have active conflicts of interest during the staffing process for examinations and other supervisory activities. OCC noted in its December 2018 response letter to the report that they believed such a policy would shift the responsibility for ensuring compliance with recusal requirements from employees to those responsible for staffing. We maintain that this recommendation does not aim to alleviate the personal responsibility all employees have to comply with recusal requirements. Rather, our recommendation aims to strengthen the due diligence of those responsible for staffing by requiring an independent, preliminary check of active conflicts of interest.

    Recommendation: The Chief Counsel should develop a policy for Large Bank Supervision (1) to check employees active conflicts of interests during the staffing process for examinations and other supervisory activities and (2) to document the results of this check. (Recommendation 6)

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  7. Status: Open

    Comments: As of August 2019, OCC stated that it sent an agency-wide reminder to employees about the workpaper review process in February 2019. OCC also noted that in June 2019, it added a new function to its Ethics Management System that automated the pre-exit process, including the workpaper review process. OCC stated that it has received user feedback on this new function and plans to finalize written guidance on the process in Fall 2019. We will continue to monitor OCC's progress in implementing our recommendation.

    Recommendation: The Chief Counsel should (1) revise OCCs instructions for conducting examination workpaper reviews to ensure that they are complete and (2) communicate the revised instructions to employees. (Recommendation 7)

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  8. Status: Open

    Comments: As of August 2019, OCC noted that it will formalize and document findings from periodic assessments of its ethics program, in line with our recommendation. OCC stated that it completed a self-evaluation in December 2018. We will follow up with OCC about the documented results of that evaluation and continue to monitor its progress in implementing our recommendation.

    Recommendation: The Chief Counsel should (1) conduct a periodic self-assessment of OCCs ethics program, including evaluating the implementation of its associated controls, policies, and guidance; (2) document the results; and (3) take action based on this assessment, as appropriate. (Recommendation 8)

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  9. Status: Open

    Comments: As of August 2019, OCC stated that it plans to highlight additional risk factors where regulatory capture will be considered when the agency updates the Enterprise Risk Appetite Statement and Office of Enterprise Risk Management charter for fiscal year 2020. We will monitor OCC's progress in implementing our recommendation.

    Recommendation: The Chief Risk Officer should expand OCCs approach to addressing the risk of regulatory capture, including (1) revising its risk appetite statement to address risk areas other than reputational risk and (2) identifying additional factors to analyze when assessing the risk of regulatory capture. (Recommendation 9)

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

 

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