Reports on the Standard Chartered enforcement action by the New York State Department of Financial Services have described DFS as a “provincial” regulator. Presumably, “provincial” here means that DFS is a state regulator, not that it doesn’t know which fork to use when presented with an artichoke. Still, the dismissive term is more than just a bit of English English. Rather, it’s a sign that U.K. banks and their regulators have failed to reckon with the fact that, when a state regulator wants to, he or she can take the “dual” in U.S. bank regulatory jurisdiction and turn it into a very powerful solo act. Who’s right and wrong regarding StanChart will play out, most importantly next week when the bank pleads for its life in New York before a supervisor who will be judge, jury and – should he choose – executioner. I’ll await the verdict. But, one sentence has already been pronounced: banks based in New York who expect business as usual have been reminded that a state charter comes with a state regulator with a lot of clout regardless of the niceties of global financial deliberations.
Still, cooperation is nice, as we all learned when teachers tried hard to teach us to share. Are federal regulators any better at it than state ones, and then do they behave with suitable decorum with their international playmates? Federal and international agencies play well, I know, but work? Not so hot, not so much.
It’s not just LIBOR, where the U.K. sat on the Federal Reserve Bank of New York’s worry beads for almost four years. Think Lehman Brothers, for example, where it was the unwillingness of U.K. regulators to agree to a solution sought by the U.S. that precipitated Lehman’s’ collapse and, then, all that this wrought. U.K. MPs are howling about the protectionist sentiments they believe underpin U.S. and New York actions. However, these same politicians are only taking time out of bashing U.K. regulators to turn on U.S. ones. At the least, problems in lax regulation and perverse corporate cultures cross the Pond. I love a central bank like the Bank of England with its own sherry and a choice of wines at lunch. The Fed, for all its acumen, is still serving a dish called “turkey Mugee” accompanied by a fine choice of iced tea, coffee and water. But, the august interior of Threadneedle Street and, more important, the centuries of understanding between the U.S. and U.K. do not erase the differences between our financial systems. One of the most important of these, as StanChart and its U.K. champions just found out, is that U.S. states are not U.K. counties. If a bank signs up for regulation through a state license, it subjects itself to “provincial” regulation. If it wants to hang only with the big boys, it can take out a federal charter – the U.S. offers these too.
Why like a state charter over a federal one? It’s cheaper, since there aren’t the usual assessment fees that come with a federal branch or national-bank charter. But, that’s not the reason for most – rather, it’s the different and, often, softer, regulatory regime that comes with a state license. Yes, it’s sort of true that senior state regulators pick up the phone faster than the Comptroller of the Currency when a constituent calls. But, as often as not, it’s also that the constituent never needs to call because the rules are just so comfy.
So, did New York need to confer with the feds or the U.K. before lobbing its sky rocket? No, but if it could have coordinated with them, it should have. DFS says it tried and we shall see. If its allegations are correct and federal regulators stood by, then DFS was right to go it alone; if DFS’s allegations are specious, as StanChart suggests, then DFS is the “rogue” institution, not the bank it seeks to bite. Still the last few years have seen so many cases in which federal regulators took so long to do so little that DFS should not be judged until all the facts are in.
As New Yorkers might say, the state ripped StanChart a big one. Assertions are already being widely muttered that this was done for hometown political purposes and personal ambitions. Again, the verdict remains to be seen, but I don’t think it much matters. To assert that state regulators are consumed by personal motives when they act without federal consent is to assume that federal regulators act only out of noblesse oblige. Not so, as any bank that has put its charter up for grabs between state and federal regulators knows full well. All U.S. bank-regulatory agencies are political; some just hide it a bit better than others. So, to dismiss the DFS case as political and, then, utter an incantation for StanChart is to miss the point: where there is dual regulation, there can and should be state regulators who take tough actions when the need arises.