Updated at 7:45 p.m. ET
Every action taken by federal regulators against large, systemically-important financial firms -- those commonly referred to as "too big to fail" -- will be made public, House Financial Services Committee Chairman Barney Frank told the Huffington Post.
This is a sharp break from current practice.
Currently, federal banking regulators can secretly get banks to modify their behavior and practices. For example, regulators can tell a bank to stop a particular activity, beef up lending standards, or increase the amount of capital they keep to protect against potential losses --
all hidden from public scrutiny.
Now, Frank says, his legislation, which would establish for the first time a way for the federal government to deal with those firms deemed "too big to fail," will call for the elimination of these secret agreements between regulators and those they regulate. For these firms, every action taken by regulators will be public.
The current system "is going to be changed," Frank emphasized in an interview. "It's going to be publicly disclosed. There will be no separate publication," he said, referring to previously secret agreements between banking regulators and banks. "It will all be public."
Frank said he's adding this provision into the draft bill released Tuesday.
In response to concerns that regulators were ineffective prior to the onset of the crisis, Frank said: "That's why we're changing the rules, so that can't happen again."
A former head of enforcement at the Office of the Comptroller of the Currency -- the regulator of national banks like Citibank, Bank of America, JPMorgan Chase and Wells Fargo -- said the proposal is a mistake.
"There are a multitude of circumstances which can be resolved on an informal basis, that do not involve the public, and the public doesn't need to know about it. It can be detrimental to the financial institution," said Brian McCormally, a partner at Arnold & Porter LLP who for five years served as the OCC's director of enforcement and compliance. "It will be detrimental to both bank supervision and to the banks."
Nonpublic regulatory actions lie at the heart of bank regulators' enforcement strategies. For the OCC, "most bank supervisory issues are resolved informally," said John Dugan, the agency's chief, in March testimony before Congress. Informal actions are not public nor are they directly enforceable:
The heart of our enforcement policy is to address problems or weaknesses before they develop into more serious issues that adversely affect the bank's financial condition or its responsibilities to its customers. Once problems or weaknesses are identified and communicated to the bank, management and the board of directors are expected to correct them promptly.
Management's response to addressing problems is an important factor in determining if the OCC will take enforcement action, and if so, the severity of that action. Even so, our approach permits most bank problems to be resolved through the supervisory process, without having to resort to an enforcement action.
When the normal supervisory process is insufficient or inappropriate to effect bank compliance with law and the correction of unsafe and unsound practices, Congress has provided the OCC with a broad range of potent enforcement tools.
In the OCC's experience, national banks usually go to great lengths to take the corrective steps necessary to achieve compliance with informal enforcement actions.
"The entire purpose of having an informal enforcement apparatus is that the banking agencies have so much power they are able to get accomplished a great deal on an informal basis," McCormally said. "If the regulators have a concern about the operational aspects of an institution, and they communicate it in an informal way, the banks will correct it."
"But...if all of the informal actions become public, then there's no advantage to agreeing in an informal manner. We ought to just litigate every matter because nothing can be gained by simply agreeing on an informal basis in a public forum," he added.
In July, the Wall Street Journal reported that the OCC had entered into a secret agreement with Bank of America requiring it to "overhaul its board and address perceived problems with risk and liquidity management." The paper also reported that Citigroup had been operating
since 2008 under another secret agreement with the OCC.
A spokesperson for the OCC had no immediate comment.
Those agreements would be made public, Frank said, as would similar agreements with firms as large and interconnected as Citigroup and Bank of America.
"We want people to be nervous about investing with these firms," Frank said.
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