You were in this role for seven months, and despite being a temporary appointment you appear to have been very busy. What would you say has been the highlight of your time at the OCC?
I came with three objectives and I think I made substantial progress on all three. First was to restore the morale of the agency, to re-empower the boots on the ground of the supervisors here, because this is primarily a supervisory agency. I think many decisions have become very centralised in Washington, empowering the line examiners who, in my view know best what the risks are with respect to the institutions they supervise. I think it was a message shift, but also really a cultural shift, to empower those who know best to tell us what they are seeing, rather than a centralised planning approach that may be both under and over inclusive.
The second thing that I really wanted to achieve, that we have made dramatic progress on, is to right size regulatory burden and encourage economic prosperity in this country in line with the President's agenda.
I put out many proposals for economic growth in my Senate testimony in June. I wanted to start a conversation that was off the beaten track at the time, to re-orientate the way that we think about banking regulation in the US, the history and context of why it is here in the first place; to really get back to first principles of why we regulate banks, why they are regulated differently than everything else. If you have sort of a fundamental understanding in concept and fluency, in the public dialogue with that, then I think you get better results of why we should undertake or not undertake certain policies.
And the third thing was to promote and defend the federal charter in the US - that has many ramifications, it is a debate that has been going on for 154 years, as long as this office has been here. The courts and this office have jealously guarded the rights and privileges of the federal charter, and, when you think about it, it was a revolutionary concept at the time. The concept of the US - of many states in one federal union with a federal corporation - is still unique 150 years later. It was designed to promote economic prosperity in the country, and it is also unique in a governmental federal bureaucracy to have an agency that is designed to promote economic prosperity through private capitalism, and that mission still resounds today.
The three concepts that I just mentioned are interrelated and can’t be viewed in isolation, they all work together to promote that mission, and promote prosperity and opportunity for all of the Americans in this country.
What initially drew you to the OCC, why did you take the leap from firm to regulator?
I had a wonderful life in the private sector. It wasn’t something, certainly at the stage I was at, that one would give up very easily, especially for a temporary appointment. I was on the President’s transition team at the Treasury Department and even though I wasn’t specially assigned to deal with the OCC, those issues were around, and it became clear to people that I had an expertise for the agency and frankly I cared very deeply about the agency as well, having grown up being trained by former Comptroller John Dugan, even before he was Comptroller, and having worked with his predecessors, Jerry Hawke and Julie Williams before that. I had this very deep appreciation for the agency, its mission and the people, and to me it was very important in a time of transition that somebody, especially when I was asked by the Treasury Secretary, that was experienced with the agency and who knew it, who could immediately jump in and know what all the issues are and help to really restore it to its pre-eminence as the premier bank safety and soundness and chartering regulator in the world.
As a private citizen in the private sector, you have to make business decisions. I thought, what is the value that I can achieve during this period in reaching that goal of restoring the agency to its pre-eminence as a premier banking regulator in the world. Can you do that in a short time like six months, is it worth interrupting your life to do that public service, can you achieve that goal?
I thought I could, and I am very satisfied with the results here at the end of it. I think if anything we, and I say we because of the really dedicated team of people and professionals here at the OCC, we have achieved so much in the past seven months and everyone should be extremely proud. I think the agency is extremely well positioned for Mr Otting when he walks in the door on Tuesday morning.
What do you make of the allegations from democratic members of the Senate that you have been illegally serving in office as of October 16, when you completed 130 days of service as a ‘special government employee’?
Look, I am a lawyer and so I don’t think very much of it. The law is pretty clear if you actually look at it, maybe they don’t want to look at it because it would dissuade them from making the accusations. The law is very clear that first of all, the secretaries’ appointment under the National Bank Act has no time limits associated with it, obviously that is why I am here, it is an unusual animal and yet obviously an effective one. The status as a special government employee just goes to whether really you need to sign the President’s ethics pledge that the Obama administration made exceptions for short term employees and the Trump administration follows. The only question is whether you need to execute that pledge, that goes to whether the legality of whether you serve in office.
"Look, I am a lawyer so I don’t think very much of it"
To me that is just a way for people to try to shut down the debate, because they don’t have good arguments to counteract yours, and I think that is unfortunate. Really, we need to raise the bar and I am happy to engage in dialogue - even with people that disagree with me as you have seen from my debates with Richard Cordray.
He is a dear friend of mine, but we have totally different views on the world. We are both skilled advocates for our positions and that is the way that dialogue should happen in this country and in this city, to advocate policy. Certainly, in other countries I think they are a little bit better at it, where you have maybe a parliamentary democracy and you have a secretary and a shadow secretary and they both have to make their arguments forcefully and ultimately the people at the time of the general election get to decide which ones better, or not.
In our case with Richard Cordray, it was the Senate and it was very close, but I think what you see from the other side is when you don’t have a good argument, and you just make accusations that don’t really hold up. I think it is incumbent for the press and the public to question, to keep saying why, and it is good that you are asking me this question as a journalist because you get down to the root. Is there anything there? And really, there isn’t.
What was your impression of the recommendations within the report on the banking sector that was released by Treasury in June?
I thought it was very well done, and I think it provides a great road mark and benchmark for the regulators and for Congress to follow in the next few years to implement it. In my view it was very balanced, measured, and thoughtful because it listened to a wide spectrum of people. It is especially helpful when there are inter-agency issues of coordination between various independent regulatory agencies here in the US, to benchmark where they can get to.
For instance, with the Volcker Rule. It is a hard one because five agencies have to get together with different perspectives on the entities that they regulate, different parts of the market that are being regulated. The Treasury Report helps provide a benchmark for appointees of the new President, even with respect to their various parts of the market, to work towards that.
I think the question for the agencies as they get together, to say rewrite the Rule, over the next six to nine months is: why is this different than the Treasury Report, why are we deviating, do we have to? There will be a certain stress test if you will against the Report that is incredibly helpful rather than having to make the agencies, from their different positions, create a new rule out of whole cloth.
How much of a priority do you think it should be for the OCC to introduce a fintech charter, and do you expect Mr Otting to continue to push this agenda?
I read a good article about that today, maybe written by the person asking me this question. I have been fairly consistent in what I have been saying in my tenure here, which is that fintech is part of this industry, it is here to stay and it is changing the nature of business. The business of banking, which is the statutory term used in the National Bank Act that has evolved since the 19th century, is even recognised by recent unanimous supreme court decisions and will continue to change.
Ultimately at the foundation, the business of banking includes taking deposits, lending money or paying cheques, and so I feel very confident of the legality of our rule that allows for the institution of a special purpose charter. That special purpose charter regulation, by the way, is not something that the agency ever adopted to grant a fintech charter, it was put in place many years ago for an entirely different purpose. That said, having been a regulatory lawyer on the outside I feel very confident of the legality, should Mr Otting want to use it.
We have to see how the market evolves, we are seeing a lot of interest in full service banks, like Varo who filed an application to have a fully mobile, full service the Federal Deposit Insurance Corporation (FDIC) insured bank. I think that is something we should all be able to agree on, and we will see if they need to go get FDIC insurance, here at the OCC we are certainly very encouraging of people who want to found a bank based on that concept.
We have statutory special purpose charters, like trust banks, bankers’ banks and credit card banks that may fit the model of a fintech business, and you know you can certainly see with respect to some parts of the evolving market place that being custodian for a digital ledger might be something that can fit into a trust bank in certain circumstances. In those respects, we are certainly amenable and those charters may have fallen a little bit out of disfavour over the last few years because of people’s rigid adherence to a separation of banking and commerce.
I have questioned that rightfully and started that dialogue, and certainly my own view is with respect to established statutory exceptions to the separation of banking and commerce those are entirely fair game, and with respect to the special purpose charter, I do think that is something Mr Otting is going to have to face, I think it is legal and to me the real question is, is there a right match to do that? We haven’t yet found one in seven months, but I think over his term those opportunities will arise and there will have to be a decision of whether he wants to take the agency there, but I think there will be a great opportunity if that is what he wants to do.
What other issues do you expect that Mr Otting will prioritise in his tenure as Comptroller?
I can’t speak for him, I think all the issues that we are seeing are out on the table. I know in my initial conversations he is very much, like me, interested in the moral of the agency and empowering the examiners and listening to them and restoring that culture. I think that this went a little bit by the wayside in post financial crisis regulatory reform, and encouraging economic growth is almost unescapable, and being part of the President's administration like I am I know that he is a strong proponent of that as well.
Late last month you presented the Winter Park National Bank of Florida with the first full service national bank charter since the financial crisis. How important do you think it is that the OCC continue the process of chartering new banks?
Absolutely important. I have been a big proponent of de novos, what you see a lot in the market cycle is that there will be a period of consolidation, followed by a period of entry. I think we have definitely had the period of consolidation, which may be somewhat continuing at the moment, but we don’t have the entry into the market. I think there has been a hold up at the FDIC for whatever reason - maybe it is market based, maybe it is their view of the market, maybe it is just bureaucracy. But having been on both the outside and the inside there is a real fear for organisers of banks, they only have a limited amount of money to start a bank and to capitalise it and to run it until it becomes profitable and if they have to go into a particular governmental process that may or may not result in a yes or a no, or you may just sort of end in purgatory for a long, long time.
They are probably going to avoid that, it has a definite chilling effect. I worry we have gotten to the stage where there just is lack of interest because people don’t even approach the FDIC or the OCC, because they fear it is a road potentially to nowhere. I think that we will see more opportunities as the leadership changes at the FDIC and I would hope that there would be better coordination between the federal regulators to be able to right size that process and make it more efficient and effective.
In August, the OCC called on banking institutions for public comment on how best to improve the Volcker Rule. What sort of response did you get to this, and what suggestions are being considered?
We got about 8,000 comments to our inquiry. As you recall this is the very beginning of the process of revising a rule, so even before the notice of proposal making this is an information collection request. Basically, as the agency sat down to get a proposal together, which also would be subject to notice and comment, we thought, why don’t we also invite the public that has had to live with this rule for the past seven years to say what they think, given their experience would be good changes, or not good changes.
And so that is the spirit behind that collection, there were probably about 60 or 70 very substantive letters, the other ones were shorter and we are working through all those issues.
The Volcker Rule itself has some challenges, it is over-inclusive in the nature of the institutions it applies to, certainly the smallest institutions present very little systemic risk themselves, let alone what type of market activity they might be involved in. They also have larger institutions frankly that don’t really engage in the type of activities that the Volcker Rule is meant to regulate, and then the question becomes an exercise of compliance - will it outweigh whatever benefits the prohibition has itself, not to mention the specific prohibitions of the Volcker Rule when you get into them? Proprietary trading is kind of a mess, because no one knows what it is it has a chilling effect and may even have a long term detrimental effect on the liquidity of our financial markets here in the US.
On the covered funds side, it is a lawyer’s paradise. I think I have said that before and I say it again because it is entirely an odd construct that can be manoeuvred around with skilled lawyering, and I am not sure why we have it other than to keep lawyers fully employed. That is maybe a comment to my detriment in a future life, but it is certainly an observation as a policy maker that I think we have to be mindful of, we shouldn’t just have useless compliance exercises.
To what extent do you think that the separation of banking and commerce is serving the best interests of the US banking system and economy?
Well look, we have to have that conversation, I have been labouring in these vineyards for 25 years and it was always a more novel concept. I gave a speech on this at The Clearing House, where I give a longer rendition of the history, but the Bank Holding Company Act itself really puts up the affiliation restrictions of separation of banking and commerce was only first introduced in 1956, and it wasn't an absolute bar until 1970.
You are talking about my lifetime for these restrictions being in place, and we somehow have gotten to the stage where in the US at least we accept this almost as a religious exercise, not questioning the reason why. I was a finance guy at Wharton before I went to Harvard Law School, and one of the basic principles of financial economics is financial diversification of your portfolio, which will reduce the risk of your portfolio because idiosyncratic risks of the various items in your portfolio should offset one another.
So basically, when you look at this from a regulator’s standpoint of having to regulate the risk of the various institutions, and to the industry you are creating risks by not allowing the diversification to come from the affiliation with non-financial companies, we have to start a conversation, especially in light of the financial crisis, about how the more affiliated companies did during the financial crisis.
There are still some grandfathered entities, there are large ones say like GE Capital. My own armchair analysis is that they did pretty well during the financial crisis, they didn’t require government bailout, so I think the question becomes to try to align our system to be safer and sounder.
Do we want to take that off the table? Maybe we do, maybe after we study it and we look at all the empirical research that is the best policy judgement, but I think we have to think about it before we do that, because you are dealing with a large and complex financial system that presents a lot of risks that are interconnected to one another. If you are just taking out a large source of potential diversification of that risk I think you want that to be well thought out before you took it off the table, or else you keep it off the table.
You’ve been a long-time opponent of the CFPB. You campaigned against the arbitration agreement rule, which was recently abandoned, and sparred with Richard Cordray, who stepped down this month. Do you look at this as a job well done?
I think we need to right size regulation. I am not going to stop at the bounds of my own agencies, especially when it affects the institutions that are under my purview and the consumers of those institutions. And really what motivated me there, and Cordray and I come from a similar backgrounds similar places in the US - I come from Western Pennsylvania he comes from Ohio - is that it is hard to forget those hard-working people that you grew up with, and what I saw from his role was that the rule hurt those people because it took off an option off the table, half the market uses those clauses, and half the market doesn’t.
His own study shows that the total cost of credit most likely would go up by 25% for those hard-working people who are dependent on that type of credit. Where does the money go? It goes to trial lawyers and politicians who are paid off by trial lawyers, and it goes to the largest banks who can afford to absorb that exposure. So, on the one side you have trial lawyers, politicians and large banks, and on the other side you have working class Americans and small and mid-size banks that are going to be competitively disadvantaged by this.
I will, as you saw, go to the mat for those type of people to protect them from a rule like that any day.
"If Elizabeth Warren personally asked me to do it, I would consider it strongly"
Would you ever consider taking on the role of Director of CFPB?
Well, I think you know they probably have someone picked out but I think if Elizabeth Warren personally asked me to do it I would consider it strongly.
You should ask her. If she wants that I would be happy to do it.
If not that, what is the next step for you? Will you return to Simpson Thacher or another firm, look for another role in office, or take some personal time?
If the right job in public service at the right time in my life, and asked by the right person in government came along, I would consider it. But, I think my immediate goal after Tuesday when my resignation becomes effective is to take a vacation. In fact, I have been asked by the Minister of Finance of Lithuania to give a keynote address at their fintech conference in Vilnius on November 30. I will be taking off to do that as a private citizen, to give my observations on the interaction between financial technology and banking, and I am happy to do that given my Lithuanian ancestry.
Once I get back from that I plan to take a few weeks off and see what the world looks like, enjoy the holidays and at the beginning of the year start up something new, whether that be in government or in the private sector. My guess is most likely in the private sector, but we will see what comes up.
What is the best piece of advice that you were given during your time at the OCC?
My best advice was from John Dugan before I walked in the door. He said two things. First, Keith you have to understand that this is a supervisory agency, that was advice given to him by Jerry Hawke his predecessor before he walked in the door and it is something I think as a lawyer you have to understand, that supervision is by and large the biggest part of this agency.
The second thing was: you will learn a lot about how to run an organisation. For me, as somebody who is a lawyer who never had occasion to run anything, I got to put to test all my skills in being an executive and running an organisation of four thousand people with over a $1 billion budget, and all the good, bad and the ugly that goes with that. Really, it is such a necessary part of this agency to have it well run and well organised, because that is the backbone of what makes everything else possible and to make it the preeminent banking regulator in the world.