Big bank regulators at risk of influence?

Photo of People at Work“Regulatory capture”—when regulators act in the interest of the industry they’re regulating, rather than the public good—is a big concern, especially when it comes to big banks. Today’s WatchBlog explores how it happens and what regulators can do to protect themselves.

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Regulatory capture 101

Unlike outright bribery, regulatory capture is generally considered to be more subtle. For example, some factors that can increase the risk of regulatory capture include:

  • A “revolving door”—frequent movement of staff between regulators and banks that allows regulators to form social or career connections within the industry.
  • “Cultural capture”—when regulators come to share the views and perspectives of industry, usually through shared education or experience.
  • Regulator funding structure—when regulators feel pressure to do things that will attract and retain banks (and therefore, funding from those banks).

How is this playing out in the real world?

We looked at the Office of the Comptroller of the Currency (OCC), which supervises the nation’s largest banks.

OCC has policies that help reduce the risk of capture and undue influence, including:

  • Formally declaring regulatory capture as an agencywide risk
  • Rotating large bank lead examiners to a different bank every 5 years
  • Having different staff review examination findings before issuing final conclusions to the bank
  • Reviewing financial disclosures and recusing individuals with conflicts of interest

Photo of the Seal of the Comptroller of the Currency

What can be done better?

Many of OCC’s policies match up with our framework of policy objectives that help reduce the risk of regulatory capture. However, we’ve identified several ways for OCC to strengthen existing controls. For instance, OCC examiners and management aren’t currently required to record key discussions with bankers. These conversations could influence the decision to take, or not take, supervisory actions against the bank. OCC also has a policy to delete drafts of supervisory letters to the bank. These drafts could show if different perspectives and opposing views were considered before issuing the final examination.

Requiring that these conversations are recorded and these drafts are kept could help OCC ensure that its staff aren’t inappropriately influenced by the big banks. In this vein, we made a total of 9 recommendations to OCC in areas such as supervision, ethics, and enterprise risk management.


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