OCC intensifying crackdown on noncompliant banks in wake of failures

The Office of the Comptroller of the Currency will likely be quicker to bring the hammer down on banks that do not promptly address their issues.

Near the end of May, the Office of the Comptroller of the Currency (OCC) updated its enforcement manual to include steps it will take against banks that fail to promptly fix "persistent weaknesses." The update codifies the enforcement process acting Comptroller Michael Hsu described in a January speech.

However, given the recent failure of three regional banks since that speech, the agency will likely be even more aggressive in its application than perhaps originally intended back in January. Going forward, the OCC will likely take to "public shaming" actions such as cease and desist orders and civil money penalties more quickly as it loses patience for slow remediation, industry experts told S&P Global Market Intelligence.

"The idea of this is perhaps getting ahead of crises rather than being behind," said Todd Baker, a senior fellow at the Richman Center for Business, Law and Public Policy at Columbia Business School and Columbia Law School. "The agency is saying, 'We're going to be very tight on whatever deadlines we set. We don't feel like you're especially making progress. We're going to take more aggressive action.'"

Banks should take heed

In the update to its enforcement manual, the OCC said banks that do not quickly fix identified weaknesses will face a variety of consequences, such as requirements to improve capital or liquidity positions, as well as restrictions on growth, business activities, or dividend payments. The OCC said that "as warranted," it could require banks to simplify or reduce their operations, including reducing their assets, divesting subsidiaries or business lines, and even exiting from markets of operation.

While that escalation process is not new, the events that unfolded since March have likely made the OCC even more serious in its message to banks to fix problems sooner rather than later.

"It's a big deal because the regulators certainly, I would say, pre-Silicon Valley Bank, First Republic Bank, Signature Bank were taking a look at bank's ability to put these issues behind them," Wells Fargo & Co. President and CEO Charles Scharf said at a recent industry conference. "And now since that, I think it tells them that they believe the direction that they were going on was absolutely right, which is they need to be in the position to force companies to focus on this and to be clear about their ramifications."

Banks should pay close attention to the information in the bulletin, Scharf said, as they could be faced with the same fate as Wells Fargo, which is under an asset cap first imposed by the Federal Reserve in 2018, if they do not fix their issues fast.

"We have the asset cap. We have a growth restriction. And in a lot of ways, people who cover banks saw that as something kind of coming out of nowhere," he said. "Now what the OCC is doing is they're making very clear that if you don't close issues, you can expect things like that, and they were clear about additional actions that they could take."

The OCC could take more serious public actions faster than they did before, so banks should act fast if any issues are brought to their attention, said Dan Stipano, a former top OCC attorney and now a partner with Davis Polk.

"Banks should pay attention to supervisory criticism at the earliest possible stage," Stipano said. "If you do get criticism in an exam report or receive a [Matter Requiring Attention], jump on the problem and get it fixed.

"You don't want a small, unmanageable problem to turn into a large, unmanageable one. Because the OCC is saying, 'If it turns into a large, unmanageable one, we're going to take serious action against you,'" he said.

Under this more aggressive approach, the OCC may take to more public enforcement actions that could adversely impact a bank's shares and leadership, Baker said.

"One thing is more likely: Rather than doing a private supervisory job, they'll end up with a formal written agreement that gets disclosed," Baker said in an interview. "You're likely to see one step up from the private resolution in cases that are viewed to be serious. And that obviously has implications on a company's stock price and on how executives are viewed by the board."

Size doesn't matter

In the update, the OCC said the process would apply "generally" to banks with above $50 billion in assets. According to S&P Global Market Intelligence data, there were 54 banks with more than $50 billion in assets at March 31.

However, the agency has the discretion to apply the consequences for not remediating issues quickly to "any bank" of any size, particularly those with highly complex business models or that present a heightened risk, the update said. The wording in the update is a change from Hsu's speech in January, which singled out "too-big-to-manage" banks.

This action is another indicator that regulators are putting a much broader range of banks under the microscope following the recent bank failures, Compass Point analysts Ed Groshans and David Rochester wrote in a May 30 note.

While OCC's main target might be large, complex banks, smaller banks could also draw intense scrutiny.

"This enforcement approach is going to apply across the board. … If we're talking about an existential risk, it's not going to matter whether it's a small institution," Baker said. "One would hope that the biggest reaction [for banks] is to speed up the timetable and the urgency of dealing with important regulatory actions."