The Wall Street Journal on Friday speculated that CAMELS ratings for the biggest banks are delayed due to looming change in the Board’s supervisory philosophy after Gov. Bowman is confirmed. Or, the Journal speculates, perhaps specific examiner ratings are being overridden by senior officials outside the examination chain of commands. There’s no question that supervisory ratings are on hold, but the reason for the delay will reveal the difference between a supervisory framework with integrity and one craven to political whim.
As I’ve written, the bank-supervisory system needs radical overhaul at the FRB and FDIC and could do with more than a touch-up at the OCC. The Fed’s own report on SVB and the FDIC’s assessment of Signature show flaws from top to bottom that are virtually-identical repeats of flaws that led to the 2008 crisis. The Fed and FDIC promised big fixes, but none has been made public and some appear quixotic.
Gov. Bowman is thus right to question the way the Fed supervises and rates banks. Fed examiners rated SVB’s risk-management exposures and capabilities well until right before the bank’s imminent demise suggested a downgrade. This follows a pattern all too reminiscent also of credit rating agencies: everything’s A-OK until market forces turn inexorable because investors are far better attuned to risk than examiners. See again why I think that economic-capital measures of capital are a better way to ensure resilience under stress.
Also right are those calling for a radical rewrite of the management test behind CAMELS’ “M.” M has been judged too often with kid gloves – see recent failures – or political objectives.
One way to ensure examination-ratings integrity is transparency and accountability – see also my calls for retrospective disclosures. Examiners held accountable for errant ratings only after bank failures are of course examiners faulted far too late to make examination of any real use at all.
The Fed is right to reconsider how it rates banks and when supervisors are held to account on core safety-and-soundness criteria. It is, though, way not right if ratings delays are due to senior-official demands related to individual banks.
Fed and FDIC board members are all political appointees, as is the Comptroller. If they order supervisors to cook the CAMELS books for institution-specific reasons independent of policy controls, then bank safety and soundness is subject to whim, not the rigor essential for institutions backed by the public’s purse.
What if President Trump’s family business decides to house its growing crypto empire in a bank it comes to control or even own? Could taxpayers and – critical – competitors know the bank’s management is being held to an honest account if examination policy is opaque, CAMELS remain secret, and senior officials intervene on a case-by-case basis? Elon Musk has plans to turn X into a payment system; what if that’s by way of owned or controlled banks? What about local political figures who have long owned community banking organizations and sit on Reserve Bank boards in charge of appointing Reserve Bank presidents? Banks that make life extra-easy for major donors to politicians?
President Trump’s declaration that banking agencies are subject to political control when it comes to supervisory policy makes sense since taxpayers pay the cost of misguided supervision. Political control over bank examination findings is, though, very different when it comes to safety and soundness, fair competition, and banking-system resilience. We need to know what the Fed is doing and why. Indeed, we need to know a lot more about bank supervision in this new, hyper-charged, viral environment. Supervisory policy must be accountable and transparent; decision-making on individual banks should hold to stated policy and never, ever vary based on who befriends or contributes to whom.