The Old Rules Still Apply

Thomas J. Curry is the 30th Comptroller of the Currency, the branch of the U.S. Treasury Department that oversees some 2,000 federally chartered banks and thrifts, which combined account for about two-thirds of the banking assets in the United States. Curry, who was appointed to his post in April 2012, heads the agency at a crucial time. All federal bank regulators, including the OCC, are still working to implement the landmark Dodd-Frank Act, which might go down in history as the most consequential piece of financial legislation ever. The regulators are also contemplating how to implement the new Basel III capital framework, which would require all U.S. banks-including even the smallest institutions-to carry significantly more capital on their balance sheets, a policy prescription that has brought howls of protest from many community banks around the country. As if those challenges aren’t enough, the banking industry is struggling to overcome the destructive impact of the 2008-2009 financial crisis and the worst economic downturn since the Great Depression. The crisis is past, but a full recovery has yet to arrive.

Soft spoken and deliberate, Curry brings considerable experience to the OCC. He has served as a director of the Federal Deposit Insurance Corp. since 2004, and previously spent a total of 11 years (over two separate appointments) as the Massachusetts commissioner of banks. Curry is a strong advocate for the core principal contained within the Basel III framework, which can be summarized as: better capital, and more of it.

While he seems to imply that a $300-million asset community bank might not be subject to the same level of complexity or granularity under Basel III as a $300-billion regional bank (not to mention a $1 trillion megabank), Curry does not back away one inch from the underlying principal that the U.S. banking industry needs to be more highly capitalized than it was prior to the financial crisis.

Banks that were conservatively managed and well capitalized had a higher survival rate during the crisis, which Curry says is an important lesson for today. “I think one takeaway from the financial crisis is that the old rules still apply,” he says.

Curry sat down to talk with Bank Director Editor Jack Milligan in November.

What is your assessment of the state of the banking industry today?

A good starting point for comparison is the global financial crisis. When things were at their darkest, we had concerns about the stability of the financial system and concerns about individual institutions, whether they were large institutions supervised by the comptroller’s office or the many community banks that we also supervise. It’s a lot better today. We had some serious intervention by both the Federal Reserve and the FDIC through the TAG [Transaction Account Guarantee] Program and the Temporary Liquidity Guarantee Program that brought stability to the credit markets. The industry recapitalized itself.

Now, I think we’re really well on the way to healing, but the big issue is how soon are we going to have a vibrant economy again and, in turn, a very healthy banking industry. It’s all related. The stronger the industry is, the greater its ability to lend and the better the economy will be. So we’re very much better off now than four years ago. We certainly have more seasoned management at our banks from having gone through the crucible of the crisis and the economic downturn. Operating management and boards who have been through it really know their stuff. I think that’s going to be very helpful going forward.

What is the state of the community bank industry compared to a couple of years ago?

I think [community banks] are on the road to recovery. Certain areas of the country were harder hit and are still working through their problems, although in the Southeast, which was one of the hardest hit regions, we’re seeing fewer troubled banks. Obviously, we look at bank failure numbers from year to year, and this year they are down significantly. The real issue for community banks is: Where do we go from here? From a policy standpoint, and from my background as comptroller and a career regulator, I think one of the saving graces of our economy and our financial system has been the presence of a strong community banking sector. And one of my goals as comptroller is to continue to have a strong community bank sector and a strong presence here at the OCC. When you look at the post-OTS [Office of Thrift Supervision] integration at the OCC, we have a substantial number of community banks here, over 1,700. Community banks are important to us from an organizational standpoint. And they’re also important to us from a policy standpoint.

In terms of the Basel III capital framework, does it make sense to apply the same standards to small community banks and the very largest banks?

It depends what you mean by same standards. I think we would say you need to have higher levels of capital and better quality capital. I support that as a core principle. Do you need to have the same granularity? Do you need to have the same complexity and level of detail? That’s where I think you’d say no. I think you need to appropriately balance those things against the type of institution and its business plan. There’s always the risk that you over-engineer something. I personally try to be mindful that we’re not, especially in the context of community banks, trying to over-engineer the process or to identify and address every conceivable possibility up front.

How much flexibility will the OCC have to apply the Basel III requirements to institutions of very different size?

That’s why we have the comment process, and that’s why we very strongly encouraged institutions to use the calculator tools that the banking regulatory agencies provided and tell us how it would actually impact them and communicate that through the comment process. So we do want to see how it impacts individual institutions and we need to have a factual foundation for making any changes in the rules or regulations. But I want to move away a little bit from the specifics of Basel III rule making. I think this is reflective of our approach on all rules: Is the core principle appropriate for all institutions regardless of size? When you drill down, you ask whether this rule is appropriate for a community bank and whether you should be able to adjust it based on the types of activities the bank chooses to engage in as part of its business plan. I think we can do that.

One of my concerns is that the industry will end up being so overcapitalized that it hurts its financial performance, which ultimately could make it more difficult for banks to attract capital.

That is an understandable concern from the standpoint of the OCC. I think the decision has always been that determining the level of capital is a process that banks themselves should be involved in. We just put out guidance on the capital planning process, and we want the bank and its directors to be involved in that process, laying out the direction that the bank is going, along with the associated risk, and incorporate that into the overall planning process. I think that theoretically you can reach a point where investors and people with the money are not going to be as eager to invest in a particular financial institution or the banking industry if the returns don’t meet their expectations. Part of the process may be that we need to change those expectations. Are bank stocks a growth area? Or will investors take the more old fashioned view that you buy bank stocks and utilities for dividends and stability?

If the BASEL III structure had been in place in 2008, would the financial crisis have been different?

I think from a regulatory perspective, that’s what we’re saying. The banks that survived were the ones that had more capital and had pure forms of capital. What happened in the crisis was that the market discounted and evaluated banks based on whether they had the appropriate level of capital to support the expressed or estimated risk to the individual bank. That’s why we’re so serious and why I consider it to be a core principle. We firmly believe that higher levels of capital are necessary for a stronger, more resilient industry-one that will be able to lend in a crisis and won’t have to go through a retrenching process.

Another concern I have is that community banks don’t seem to have enough ways of making money, which is why you saw so many of them crowding in a cyclical asset class like commercial real estate. Is the community banking model broken?

A couple things. I think one takeaway from the financial crisis is that the old rules still apply. That’s what I got out of it. Concentrations are killers. Community banks in boom areas like the Southeast went into commercial real estate full throttle. There were also a large number of startup banks and they followed the same model: grow fast, bulk up on commercial real estate, do it through wholesale funding sources and then sell and cash out. That model only works when there’s a boom. When the bottom falls out, there ends up being a lot of casualties lying on the ground, and that’s what I think we’re seeing.

What I think is more interesting is who’s still standing. They are the banks that stuck to their knitting, that had high capital levels which allowed them to weather the storm, or had relationships with investors that had confidence in bank management and the business plan and were therefore willing to step to the plate and help recapitalize those institutions. If they were concentrated in commercial real estate the right way and kept those concentrations within a manageable level, and if they had controls in place, whether it was through underwriting or through credit administration, they were left standing. So I think it would be interesting to look at who failed and who’s still standing. I think there were a lot of lessons learned in the last crisis. And we could actually sing the praises of some of those guys and gals that did it right, and they did it by doing sound, old fashioned banking.

What would you like to see bank directors do better?

I hope it’s clear how much we value directors, particularly independent directors. They really are an important check and balance on the management structure. In my career, it comes down to the ‘M’. Capital is always important. But the ‘M’ is a very, very important component. It includes good operating management and an active and informed board of directors. The banks with strong management and strong boards are the ones that are still standing. [Editor’s Note: Curry is referring to CAMELS, an acronym for a regulatory safety and soundness rating system that evaluates Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to market risk. Banks receive a rating in each category based on an assessment by their principal regulator.]

It seems that the level of involvement by outside directors in the operations of their institutions has never been greater because of regulations like the Sarbanes-Oxley Act, the Dodd-Frank Act and the recent federal rules on compensation risk. And because of this, it has become more difficult for banks to find qualified outside directors.

From our standpoint, independent directors are critically important. In my career, when we’ve had a problem with an institution, it’s always more effective if you have an engaged board that you can talk to and raise the issue. I’ve never seen an effective board that hasn’t done the right thing in that situation. If you have a problem, you make tough choices.

Are you expecting more of boards now than before the crisis?

I think we recognize the importance of them even more than we did. We are formally tasking boards to do things that really were tacitly understood in the past.

In what areas have you raised expectations for bank boards of directors?

They’ve got to make sure that their banks have a strong risk management culture and systems in place. They have to make sure the bank’s controls are adequate.

Directors and CEOs that I talk to say that the regulatory environment is still very intense even though the financial crisis is well behind us at this point. They feel their regulators are still being pretty tough with them, whether it’s about loan classifications, approval for mergers or capital requirements. They feel like they’re still very much under the gun. Do you feel like you still need to be tough with the industry?

I don’t think there was ever a feeling that we needed to be tough. We need to do our job, which is to give an independent assessment of the true condition of the bank and where it stands relative to its risk. When you have an adverse economic environment, that makes it a much tougher and dynamic environment for banks and their regulators, and I think that’s what you’re talking about. I think also it’s connected to the cycle that we’ve been in. What’s different between this cycle compared to the New England downturn in the early 1990s is that you had a deep recession but also a relatively fast recovery. This is just so long and slow and there seems to be an element of serious fatigue, certainly on the part of banks and the regulators. This takes a lot out of you. And that’s why I really hope that the economy starts gaining some speed. That will do a lot to help the environment and the outlook of everyone.


Jack Milligan


Jack Milligan is editor-at-large of Bank Director magazine, a position to which he brings over 40 years of experience in financial journalism organizations. Mr. Milligan directs Bank Director’s editorial coverage and leads its director training efforts. He has a master’s degree in Journalism from The Ohio State University.

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