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. In the wake of the financial crisis, some state regulators and officials have been flexing their muscle against big banks blamed for nearly bringing down the financial system. And they have been using state laws to get some of the world’s biggest financial institutions to fall in line. The cases can result in big paydays for states, such as the $340 million settlement New York reached with Standard Chartered, the London-based bank accused of flouting U.S. sanctions by concealing $250 billion in Iranian transactions. 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.”