Banking regulation: what’s in the works and how to respond

dugan_mon.jpgJohn Dugan, the former Comptroller of the Currency, said Monday during a banking conference that his biggest fear during the financial crisis came in late 2008, during a meeting with the largest banks in the nation. He wondered whether they would accept billions of dollars and agree to let the federal government become major shareholders in their companies, as a way to stem the financial crisis.

“What struck me was how fast it was before everyone agreed to take the money,” Dugan said at Bank Director’s annual Acquire or Be Acquired conference in Scottsdale, Arizona.

Dugan said the quick consensus showed him that the financial crisis was even worse than he had thought. (Merrill Lynch CEO John Thain is on the record saying the federal government did not give the banks a choice).

“Things would be way worse now if that had not occurred,’’ Dugan said, defending the actions of federal regulators.

Dugan, who was appointed Comptroller in 2005 by then-president George W. Bush, went back to his former law firm, Covington & Burlig LLP, after leaving his job at the OCC in August.

During his speech Monday, Dugan detailed the aftermath of the financial crisis: the Dodd-Frank regulation for the financial sector that followed and what banks should do about it.

Dodd-Frank represents a fundamental shift in regulation: away from requiring disclosures and more toward telling financial institutions what products to offer and what to charge, he said. The pending regulation of interchange fees on debit cards is the biggest example of that.

“This was especially ill considered in my view,’’ he said.

Plus, it will take a long time for regulators to actually come up with rules based on the more than 800-page Dodd-Frank legislation, he said.

“I think you should prepare yourself for a relatively long period of uncertainty,’’ he said.

Not surprisingly, upcoming appointments for key regulatory positions will be important to how these rules turn out, Dugan said. A new head must be appointed for the OCC and for the Consumer Financial Protection Bureau.

One benefit of the CFPB is that its rules will apply to all financial institutions, he said. But they still have to define what practices are “abusive” to consumers, as well was what “abusive” means.

“The agency will have a single focus and purpose” and look at bank products in a way that a “prudential regulator would not do,’’ Dugan said.

Bottom line: greater regulation is here to stay, although there may be an opportunity to change things as time goes on, Dugan said. Capital requirements will be higher for banks and commercial real estate loan portfolios will undergo greater scrutiny on bank balance sheets.

Dugan told community bankers to “think hard” before making commercial real estate a major part of their strategy for the future. “In the post Dodd-Frank world, like it or not, regulation will play a bigger role for transactions or capital raising,” he said. “The center of the world is moving more toward Washington. I’m not saying that’s a good thing.”


Naomi Snyder


Editor-in-Chief Naomi Snyder is in charge of the editorial coverage at Bank Director. She oversees the magazine and the editorial team’s efforts on the Bank Director website, newsletter and special projects. She has more than two decades of experience in business journalism and spent 15 years as a newspaper reporter. She has a master’s degree in journalism from the University of Illinois and a bachelor’s degree from the University of Michigan.