Wednesday, November 18, 2009

The Failure of Regulatory Oversight

by Bill McBride on 11/18/2009 10:33:00 PM

This is a recurring theme: a bank fails, the Inspector General reviews the failure and discovers that the field examiners saw problems starting around 2002, and ... nothing happened for years.

We saw this with the Federal Reserve and the failure of Riverside Bank of the Gulf Coast, and with the FDIC / OTS and the failure of IndyMac.

Eric Dash at the NY Times has more: Pathology of a Crisis

At bank after bank, the examiners are discovering that state and federal regulators knew lenders were engaging in hazardous business practices but failed to act until it was too late. At Haven Trust, for instance, regulators raised alarms about lax lending standards, poor risk controls and a buildup of potentially dangerous loans to the boom-and-bust building industry. Despite the warnings — made as far back as 2002 — neither the bank’s management nor the regulators took action. Similar stories played out at small and midsize lenders from Maryland to California.
This is screaming for an open and transparent Congressional investigation (or something like the Pecora Commission, ht Mock Turtle). After the examiners discovered problems at the banks in a timely fashion, what happened next? Were further actions blocked by supervisors? Did examiners feel each bank was an isolated incident? How will the new regulatory structure solve this problem?

And a chilling quote from Eric Dash's article:
“Hindsight is a wonderful thing,” said Timothy W. Long, the chief bank examiner for the Office of the Comptroller of the Currency. “At the height of the economic boom, to take an aggressive supervisory approach and tell people to stop lending is hard to do.”
But isn't that the regulator's job?

Note: Alison Vekshin at Bloomberg had an excellent article last month on the same topic: FDIC Failed to Limit Commercial Real-Estate Loans, Reports Show