Earlier this week, we alerted clients to the first public discussion of the OCC’s policy of “legal simplification,” which in concert with the “heightened expectations” out for comment read to us like a wholesale rewrite of the national-bank charter. I analyzed the strategic impact of the new governance and risk-management expectations in a prior memo; now, I’ll turn to the simplification standards, with my main take-away: subsidiarization is in your future if you’re a national bank or a large foreign one under the OCC’s jurisdiction.
In the “heightened expectations,” the OCC told national banks that their boards must be independent of the parent and focus first and foremost on safety and soundness, not sending dollars back to Big Daddy. This is a major departure from current practice at many BHCs with lead national banks, where the companies are governed as almost seamless wholes and the return to shareholders is a binding, common thread.
The OCC’s standards would not only require a new purity of prudential purpose at national banks, but also hold them to still higher account in terms of buffers and other risk protection, basically bullet-proofing them as much as possible against any indignities to which the parent might seek to put them. As I said in my last memo, this essentially turns national banks into utilities that must always keep the lights shining brightly – a public-policy objective that redefines the way most CEOs I know now think of the national banks they run.
To these heightened expectations now add “legal simplification.” That this is needed at many big BHCs goes without question – a while ago, a senior Congressional staffer told me of a meeting on this question at which a big-bank lobbyist said his company owned six insured depositories only to learn from the staffer that it in fact owned seven. Pesky, those little-bitty banks. And, of course, that this doesn’t count the thousands of affiliates, subsidiaries, and other dribs and drabs housed around the world for all sorts of reasons most big BHCs can’t even remember any more.
The OCC likes simplification not just because it makes life easier for its examiners, but also because it thinks it makes big banks more resolvable and – a plus for the banks – more cost-effective. However, in pressing for simplification, the agency needs to remember its own role in messing up big banks: authorization for operating and financial subsidiaries principally designed to get national banks around lots of state rules and federal restrictions on mixing banking and commerce. These subs were crafted in the OCC’s heady days of thinking everything any bank wanted fell within the “business of banking” as long as it could be kept out of the state’s clutches. Now, the agency – much chastened by the crisis – is singing from a very different hymnal.
Later this month, I’m very much looking forward to joining a conference http://www.bu.edu/bucflp/initiatives/building-on-150-years-the-future-of-nationalbanking/ the OCC is sponsoring to assess its history over the past 150 years and its future role as the regulator of national banks that often lead the world in not just size and complexity, but also product innovation. At this session, the agency will consider critical questions like the future of federal preemption and the role its supervisors are to play setting strategy at the banks they govern. I’ll add an analysis of how national banking fits into the broader realignment of financial services, in which the shadows grow ever longer. National banking isn’t the same as it was before the crisis – the OCC’s new standards make this patently clear. But, now what?