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Man bites watchdog

19 March 2015 By Antony Currie, Daniel Indiviglio

Wall Street über-lawyer Rodgin Cohen hit a bum regulatory note this week. Sullivan & Cromwell’s top bank advocate thinks watchdogs have gone overboard to prove they’re not captured by the industry. That may resonate with many in Congress, where a bill to blunt the work of bank examiners is doing the rounds. But the 2008 crisis exposed the necessity of more robust oversight. While firms overstate the pain, room remains to ensure regulators are constructive, rather than overzealous.

Cohen reckons watchdogs are acting preemptively on the fear of being seen as in the pocket of the financial services complex. He calls it a “canard.” That, though, is a canard itself.

Take the now-defunct Office of Thrift Supervision. It called lenders under its authority “customers.” And often institutions won battles with their overseers which in hindsight should have been obvious no-nos. Forex broker FXCM is perhaps the latest example, having persuaded regulators not to impose leverage limits on customers in 2010; too much client borrowing almost killed the firm in January.

The reality was more prosaic. Often regulators lacked the knowledge, resources or simply the power to do much. The OTS, for example, was the only one to haul Lehman Brothers over the coals, before it went bust, for excessive risk-taking – to no effect.

Adding more teeth to watchdogs’ bite, therefore, makes sense. And after all, it’s their duty to be skeptical. Granted, confrontation is less welcome. Much of that, though, stems from regulators, like attorneys general, who are also in the business of cultivating voters.

But as the carnage becomes more distant in Washington’s rearview mirror, there’s a danger that legislation will dilute supervisors’ work. On Thursday, a bipartisan group of senators dropped a new bill into the hopper to regulate the regulators, forcing quicker verdicts on exams and reviews when financial institutions complain. Even some of the biggest bank critics, like Federal Reserve Governor Daniel Tarullo, have shown a willingness to consider rolling back rules for smaller lenders.

In time, institutions will adjust to the new rules. The big bank stress tests show that even a tough, nerve-racking process can come to elicit a shrug from firms after a couple of years’ transition. Even if the regulatory burden is cumbersome, adaptation and ever-shifting political winds will provide relief over time. Patience may be institutions’ best ointment for nursing watchdog-inflicted wounds.

 

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