WORD ON THE STREET: The worst days of that crisis seem very far behind us, so much so that I sometimes worry that memories, at least for some in the industry, have begun to fade. I hope that's not the case. If anything, I think we need to step up our efforts to shore up the parts of the system that didn't work as well as they should have, and to make sure that practices at banks and thrifts, particularly at large institutions, don't inadvertently sow the seeds of the next crisis.
That means, first of all, that we must continue to move ahead on implementing the Dodd-Frank Act. While we've accomplished much, there are significant rulemakings still in process that touch upon major issues that were part of the legislative response to the financial crisis. Among them are the Volcker Rule and the risk retention regulation. We are also putting considerable effort into developing a good working relationship with the new agency created by Dodd-Frank, the Consumer Financial Protection Bureau (CFPB).
By working with the CFPB, we can not only minimize the kind of duplicative supervisory efforts by multiple agencies that lead to unnecessary burden for banks and thrifts, but we can provide an important perspective for that agency's consumer rulemakings. At the same time, we are working very hard on an interagency basis to address new capital requirements, both those mandated for large banks in the Dodd-Frank Act, as well as those that are part of the Basel III capital process.
As we continue that work, we are listening very closely to the industry as we review the more than 1,500 comment letters we received. To ensure that we are providing sufficient time for prudent planning and implementation, the agencies do not expect that the proposed rules will take effect on Jan. 1, 2013.
Basel III will likely prove to be one of the most important steps we take to improve the industry's resilience and its ability to stand up to future storms. Since the beginning of the crisis, more than 460 banks have been closed, and in the end, they failed because they didn't have sufficient capital for the level of risk they took on. In addition to the imperative for raising required levels of capital – particularly for large institutions – our proposed rules target two other extremely important goals.
First, the financial crisis made clear that the quality of capital matters as much as the quantity of capital, and our emphasis upon common equity Tier 1 will not only strengthen insured financial institutions, but will also provide important reassurances to the market. In addition, the notion of capital buffers – the idea that we should take steps to conserve capital as it gets close to minimum levels – will help ensure that capital is available to absorb losses when financial institutions get into trouble.
But while the new rules stemming from Dodd-Frank and Basel III will go a long way toward shoring up the weak parts of the system, we can only accomplish so much through regulation. What I think is equally, if not more, important, is what we do through supervision – through examiner boots on the ground.
While laws and regulations take the long view, and cannot be easily tailored to new developments, our examiners do pay close attention to changes in the environment generally and changes in individual risk profiles specifically. They have the support of our policy experts, and they are able to make decisions about whether the banks and thrifts they supervise are properly accounting for those risks.
The Office of the Comptroller of the Currency has a supervisory process in place that is extremely effective in ensuring that national banks and federal thrifts are identifying risk and managing it appropriately. We have divided our supervisory program into separate lines of business, a step that recognizes the very significant differences between large banks on the one hand and community institutions on the other, with an important group of midsize banks in the middle.
Most of our resources, including two-thirds of our examiners, are devoted to community and midsize banks, and we locate our examiners in towns and cities across the country near the institutions they supervise. We develop guidance in Washington, with input from the field, but we empower our examiners to make decisions locally about the banks they supervise.
Large national banks and thrifts are supervised through teams of resident examiners that work on-site, inside the institutions they are responsible for, 52 weeks a year – although I can tell you that during the financial crisis, it was more like 365 days a year. These are highly experienced professionals, and as is the case with our community and midsize exam teams, they have the support of resources from Washington, including Ph.D. economists, lawyers, and an array of specialists in areas such as asset management, securitization, mortgage finance and consumer compliance.
Although community banks and large banks are very different, what their supervision has in common is the ability of our examiners to tailor individual strategies and solutions, to react quickly to changing circumstances and to take advantage of the resources that a supervisory agency with a national perspective can bring.
As important as all of that is, the financial crisis made plain that it wasn't enough. I'm not speaking only of our supervisory regime, but also of the standards that were put in place in the years after the thrift and banking crises of the late 1980s and early 1990s, including prompt corrective action, stronger audit requirements and reforms to the real estate appraisal system. Those were very important reforms, and for a decade and a half, we all took comfort in the fact that the system itself seemed more resilient, that our supervisory structure was more effective and that banks and thrifts were far more safe and sound than they had been prior to the early 1990s.
I think it's important that the supervisory agencies, both here and abroad, continue to discuss the expectations we have for large financial institutions, with an eye toward improving those standards.
Let me close with this thought. The challenges ahead are significant, but it is essential that we meet them. The U.S. economy will not be restored to full prosperity without a strong banking system. An economy as large and diverse as ours needs banks and thrifts of all sizes, from the smallest community institution to the largest multinational bank, to finance it and to meet the needs of our families, communities and businesses.
What remains is for the banks and federal savings associations that make up the federal system to put the lingering effects of the financial crisis behind them and restore the trust and confidence of the American people.
Thomas J. Curry is the Comptroller of the Currency. This article is adapted and edited from a Nov. 15 speech delivered before The Clearing House's Second Annual Business Meeting & Conference in New York. The original text is available online.