NEW YORK (TheStreet) -- The Office of the Comptroller of the Currency on Thursday proposed a new set of standards for the the large banks it regulates, outlining its expectations for enhanced governance and risk management, and setting up supervisor tools to make sure the standards are met.
Most media coverage of bank regulation focuses on the Federal Reserve and the Federal Deposit Insurance Corp. The Federal Reserve supervises major U.S. bank holding companies, while the FDIC has a supervisory role for all state-chartered commercial banks and thrifts, often taking the lead examination role.
But nationally chartered banks -- that is, the banks themselves, and not the holding companies -- are supervised by the OCC. The OCC also took over the supervision of thrifts -- savings and loan associations -- when it absorbed the Office of Thrift Supervision in 2011. The OTS had supervised Washington Mutual, which failed in September 2008 and was the largest U.S. bank or thrift ever to fail.
These are the largest four U.S. banks, by total assets, as of Sept. 30, all of which are regulated by the OCC, according to data supplied by Thomson Reuters Bank Insight:
- JPMorgan Chase Bank, NA, the main subsidiary of JPMorgan Chase (JPM), with total assets of $1.990 trillion as of Sept 30.
- Bank of America, NA, held by Bank of America (BAC), with total assets of $1.439 trillion.
- Citibank NA, held by Citigroup (C), with total assets of $1.335 trillion.
- Wells Fargo Bank NA, the main subsidiary of Wells Fargo (WFC), with total assets of $1.328 trillion.
The regulator also used some strong language, saying "each bank's board must ensure that the bank does not function simply as a booking entity for its parent and that parent company decisions do not jeopardize the safety and soundness of the bank. This often requires separate and focused governance and risk management practices."
Many major decisions -- including the market hedge trading strategy of JPMorgan Chase's Chief Investment Office, which led to over $6 billion in losses during 2012 -- are made at the holding company level. But a banking company's federally insured deposits are held within the actual bank charters, which the OCC regulates.
"The second expectation generally requires large institutions to have a well-defined personnel management program that ensures appropriate staffing levels, provides for orderly succession, and provides for compensation tools to appropriately motivate and retain talent that does not encourage imprudent risk taking," the OCC said. This would imply that compensation overly based on quarterly results will be discouraged.
The OCC's third expectation is for a large bank to formally state its "acceptable risk appetite," including setting benchmarks for capital strength, liquidity and earnings, along with "the amount of risk that may be taken in each line of business, and the amount of risk that may be taken in each key risk category."
The regulator's fourth expectation is for banks to have "reliable oversight programs," while the fifth expectation requires strong board of directors oversight, including a willingness to "provide a credible challenge" to the decisions made by senior management.
The rules also provide a quick path for the regulator to enforce the standards, including discretion to require written correction plans for the banks if standards are not met, and providing for a relatively short time frame for additional regulatory action if necessary.
"The standards announced today build on lessons learned from the financial crisis," said Comptroller of the Currency Thomas Curry in a press release. "They will contribute to a safer financial system for all of us by providing clear and enforceable standards for the risk management and governance of our largest institutions. They provide additional supervisory tools to examiners of large national banks and federal savings associations, and they will measurably enhance our supervision of these institutions," he added.
-- Written by Philip van Doorn in Jupiter, Fla. Follow @PhilipvanDoorn
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