Against big banks, state regulators flex their muscles

By Danielle Douglas and Brady Dennis

When a little-known New York regulator this month threatened to revoke the charter of a major international bank for allegedly laundering money for Iran, the shock waves were felt in Washington as much as on Wall Street. Federal regulators were furious. Some felt New York had jumped the gun, jeopardizing a more methodical investigation being conducted inside the Beltway, officials familiar with the matter said. It was not the first time state officials had leapt ahead of federal authorities. State attorneys general were the driving force in reining in improper mortgage practices by big banks, a task federal regulators had repeatedly failed to accomplish on their own. State attorneys general across the country have shown a penchant for going after troubling behavior by banks earlier than federal officials. They flagged abusive lending practices by banks, undertook investigations and sought to prosecute bad behavior, critics say, as federal regulators largely overlooked the problem and at times even impeded the efforts of state officials. Local officials outpaced federal regulators in identifying abuses of consumer protection laws, but observers say the story changes when it comes to maintaining the “safety and soundness” of banks. State banking regulators traditionally have been no faster to spot problems or to undertake enforcement actions than their federal counterparts, said Karen Shaw Petrou, managing partner of Federal Financial Analytics. “Between the tortoise and the hare, they are all tortoises,” she said, adding that such laxity was especially true in the run-up to the financial crisis. “The problem here was not too many regulators falling all over each other to ensure a safe and sound banking system.”