Monday, July 12, 2010

FDIC Reinforces Power Among Regulators


Philip van Doorn

07/12/10 - 05:04 PM EDT
WASHINGTON (TheStreet) -- The Federal Deposit Insurance Corp.'s board of directors voted on Monday to revise its agreements with other federal bank regulators to "enhance existing backup authorities" over institutions it doesn't directly supervise.

This will make it easier for the FDIC to take action against failing institutions that are primarily supervised by other federal agencies.

"While the FDIC has had backup authority for several years, and for the most part it has worked rather well, the past financial crisis provided us with a strong and sober reminder that the activities of large banks are often very complex and opaque," said FDIC Chairman Sheila Bair in a statement.

She continued: "The FDIC needs to have a more active on-site presence and greater direct access to information and bank personnel in order to fully evaluate the risks to the deposit insurance fund on an ongoing basis and to be prepared for all contingencies."

It can be tough to tell who regulates a bank. The largest holding companies are mainly regulated by the Federal Reserve, while nationally chartered commercial banks -- the ones with "National Bank", "National Association" or "NA" in their names -- are regulated by the Office of the Comptroller of the Currency. Federal savings banks and savings and loan associations -- some of which have "Federal" as part of their names -- are regulated by the Office of Thrift Supervision, or OTS.

This leaves the states, which supervise most U.S. banks, with the FDIC looking over their shoulder. For most states, the FDIC effectively functions as the primary regulator, since the agency's examinations of state banks are more thorough than the ones conducted by state examiners.

The OTS is likely to be phased-out soon, which is hardly surprising, since it was the agency that presided over the September 2008 demise of Washington Mutual in the largest U.S. bank or thrift failure ever. Recent criticism of how the meltdown of WaMu was handled was cited in the statement released by the FDIC on Monday.

"The need to improve the last agreement -- one that was reached in January 2002 during the boom years of banking -- has been voiced by several stakeholders," the FDIC said in its press release, being making specific mention of a joint evaluation of WaMu's failure by it and the Treasury Department's Office of the Inspector that was released in April as well as critical comments made by Sen. Carl Levin ahead of a Senate hearing on the subject around the same time.

The OTS was pushed by the FDIC into shuttering Washington Mutual as the nation's largest thrift hemorrhaged deposits. The FDIC then sold the failed thrift to JPMorgan Chase (JPM).

The Treasury Department's Office of the Inspector detailed in an April report how the OTS maintained Washington Mutual's CAMELS 3 or "satisfactory" rating until February 2008 even though the thrift was being overwhelmed from losses tied to option-payment and other low-quality mortgage loans. The OTS lowered Washington Mutual's CAMELS rating to a 4, which means "generally exhibits unsafe and unsound practices or conditions," just before shutting the thrift down.

The IG report also said it was "difficult to understand" why the OTS didn't lower Washington Mutual's ratings years earlier, despite "the multiple repeat findings related to asset quality and management."

While the report didn't spare the FDIC, which already had authority to act against Washington Mutual as a threat to the Deposit Insurance Fund, it noted that the FDIC "elected not to take enforcement action against WaMu in 2008 Because of procedural hurdles."

Those procedural hurdles were addressed in the agency's update to its Memorandum of Understanding with the other agencies. Outgoing Comptroller of the Currency John Dugan, whose office will take on the responsibilities of the OTS if and when the bank reform legislation is put into effect, supported the FDIC's action, saying he was "comfortable with the MOU as drafted."

-- Written by Philip van Doorn in Jupiter, Fla.