Fed E-Mail Disclosure May Chill Confidential Bank Supervision
“The regulatory process could be chilled or stifled because of a reluctance to speak candidly,” said Robert Clarke, a former comptroller of the currency and now a senior partner at Bracewell & Giuliani LLP in Houston. At a minimum, supervisors may communicate less via e-mail, said Oliver Ireland, an ex-Fed attorney now at Morrison & Foerster LLP in Washington.
The criticisms may slow a push for greater transparency among regulators by President Barack Obama’s administration, which is seeking the biggest overhaul of U.S. financial rules in decades. Consumer advocates have hammered the Fed and other agencies for failing to publicly identify banks with lax lending standards during the credit boom that turned to bust.
The House Oversight Committee’s release of internal Fed documents at hearings in June showed confidential supervisory discussions and data can end up subject to public scrutiny.
Included in the releases were the Fed’s private gauge of Bank of America Corp.’s financial strength, and communications between officials including Chairman Ben S. Bernanke and Richmond Fed President Jeffrey Lacker on the bank’s threat to call off purchasing Merrill Lynch & Co.
House Subpoena
The documents were obtained under subpoena as part of the House panel’s examination of the government’s January rescue package for Bank of America.
The material included private exchanges among Fed officials in Washington, New York, Boston and Richmond, Virginia, about concerns that Bank of America would break off its Merrill purchase, deepening the financial crisis. Among documents divulged was a full analysis of Bank of America, along with a numerical rating of its condition, normally not made public.
“Federal banking regulators have an ironclad tradition of preserving the confidentiality of exam ratings,” said Patricia McCoy, a University of Connecticut law professor who teaches banking and securities regulation. “The concern is that if a rating comes out and it’s relatively weak, there could be a run on the bank.”
Banks are subject to regulation in exchange for being able to access the Fed as a lender of last resort. The four main federal supervisors, the Fed, OCC, FDIC and Office of Thrift Supervision, together employ about 6,000 bank examiners. The system is predicated on the assumption that regulators can get better information about banks’ operations through private communication rather than public demands or penalties.
No Guarantee
Critics say the financial crisis shows that confidentiality doesn’t guarantee sound banking regulation. The Fed and other regulators have acknowledged they didn’t do enough to police lending standards during the credit boom earlier this decade that turned to bust in 2007. Since the start of that year, financial firms worldwide have reported $1.47 trillion of writedowns and losses, according to Bloomberg data.
“The idea that you can only do bank regulation with secrecy -- that’s a model that’s failed,” said Ed Mierzwinski, consumer-program director at the U.S. Public Interest Research Group, part of a coalition of consumer, labor and civil-rights groups lobbying on financial regulation. “Is total transparency the answer? Maybe not,” he said. “But some more transparency would help, and some more accountability would help as well.”
Richard Spillenkothen, former director of the Fed’s bank- supervision division and now with Deloitte & Touche LLP, said that while he recognizes the argument for more transparency, keeping supervisory information private “is better for the system, which should benefit taxpayers over time as well.”
Clash on Disclosure
Regulators and the Treasury clashed in April over how much information to make public about stress tests of the biggest 19 U.S. banks, with some officials concerned about potential damage to weaker institutions. The Treasury, led by Secretary Timothy Geithner, had pushed for broader disclosure, people familiar with the matter said at the time.
That danger remains, according to Mark Williams, a former Fed bank examiner who now teaches at Boston University. He said disclosure of confidential information may lead to short sales of a bank’s shares and make it harder to manage weakened banks. Short sellers borrow shares and sell them in anticipation of profiting from a drop in price.
“Transparency isn’t solving the problem -- we need to get to the root,” which is to improve training, pay and retention of examiners, Williams said.
‘Jittery’ Public
Disclosure is also sensitive at a time when the public is “jittery” about the safety of insured deposits, said McCoy at the University of Connecticut.
Among confidential data revealed by the subpoenaed documents was Bank of America’s “Camels” rating, a judgment based on measures including banks’ asset quality, earnings and liquidity.
“If banks start to feel that the Camels ratings will be made public, that would be bad both for banks and for regulators,” said Mark Tenhundfeld, regulatory-policy director at the American Bankers Association. “Examiners need to be able to do their jobs and not worry about how the judgments that they are passing on the banks play out in the public light.”
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