(Bloomberg) -- A decision by President Donald Trump's newest Wall Street regulator to keep government examiners inside banks is drawing criticism from Senate Democrats, who said it will make watchdogs more likely to sympathize with finance executives they are responsible for policing.
For years, the Office of the Comptroller of the Currency had intended to pull hundreds of examiners out of the biggest banks and relocate them to government offices -- part of an effort to prevent regulators from getting too cozy with companies they oversee. But in one of his first moves since taking over the OCC last month, Joseph Otting changed course. The former banker said the plan to remove supervisors wasn't practical, adding that the agency had taken other steps to prevent “regulatory capture.”
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His decision isn't sitting well with Sherrod Brown, Elizabeth Warren and other Democrats on the Senate Banking Committee. In a letter to Otting, they argued that an abundance of scandals involving banks in recent years shows the government needs to rethink how it supervises the biggest lenders. The lawmakers cited Wells Fargo & Co., which has been plagued by abuses such as opening up bank accounts without clients' permission and allegations that it sold consumers auto insurance that they didn't need.
“This is particularly troubling given that this reversal comes at a time when the OCC should be endeavoring to improve the agency's supervisory program in the wake of repeated and significant unsafe and unsound banking practices at Wells Fargo,” the senators said in their Dec. 20 letter, which was signed by Brown, the banking panel's top Democrat, and five other committee members.
The senators want the OCC to explain its decision, asked whether Otting talked to Wall Street bankers about the move and questioned how the agency plans to maintain its examiners' independence. They sought a response by Jan. 5.
OCC spokesman Bryan Hubbard declined to comment on the letter.
Strengthening Oversight
Examiners play a crucial role in bank oversight because they are among the first lines of defense in making sure lenders follow the rules and don't take undue risks. Still, some industry lawyers argue that having supervisors inside firms actually strengthens monitoring because it can foster a close relationship that enables the government to get more useful information from bankers.
The withdrawal of examiners was initiated by former OCC chief Thomas Curry, a Barack Obama appointee.
When former bank lawyer Keith Noreika took over the OCC on an acting basis in May, he paused the effort to relocate supervisors, arguing it was overly expensive to rent new office space in markets like Manhattan. Otting made the determination by his second week at the agency that it wasn't necessary to pull examiners, which Bloomberg News was first to report earlier this month.
Otting told reporters this week that he had weighed the cost of setting up outside offices instead of occupying the banks' own space.
“Was it a factor? I'd say yes,” Otting said.
The Democratic senators said other criteria, such as making sure banks don't blow up the economy, should take precedent.
“The costs of office space pale in comparison to the costs of the last and the next financial crises,” they said in their letter.
To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net.
To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott
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