September 17, 2010
Authored by: Barry Hester and Bryan Cave
In a speech before the nation’s banking accountants and auditors, OCC Senior Deputy Comptroller for Bank Supervision Policy Tim Long previewed key areas of regulatory concern in the wake of the financial crisis. He lamented the state of loan loss reserve provision rules and pontificated on community bank concentrations in commercial real estate and capital requirements. Specifically, he wants to see capital buffers that are over and above minimum regulatory requirements and are proportional to high CRE concentrations. He is evidently “struck by how often [analysts of the current financial crisis] miss a crucial point” that its root causes were remarkably similar to those of past crises, and he says the OCC intends to refocus on the fundamentals of sound banking.
Long was not shy in assigning blame for industry and regulatory distance from these fundamentals. He decried a period that “allowed accounting doctrine and the accounting profession to encroach on what is fundamentally a process of credit estimation” and a matter of banker expertise. Echoing a previous OCC take on FASB 114, he argued that the “incurred loss” model underlying current GAAP standards limits banks’ ability to provide for loan loss reserves in good times, when historical data substantiating credit risk is harder to produce. Banks should, in the opinion of Mr. Long, instead be permitted (and instructed by examiners) to make provision for losses on a more forward-looking basis and in light of macroeconomic trends. Related FASB changes are pending but are far short of the “expected loss” model Long has previously espoused. Accountants argue that the incurred loss model provides the more accurate financial snapshot and reduces the risk of earnings manipulation.
In addition, Long singled out community bank concentrations in commercial real estate and discussed the need for more rigid limits. Here he acknowledged some degree of regulator responsibility and argued that the principles of the 2006 interagency guidance on CRE concentration appropriately identified this risk and should have been more formally implemented. Long argued that regulatory capital minimums are just that—minimums—and that regulators should be more precise in calling for greater capitalization. In particular, it is Long’s contention that certain CRE concentrations should trigger mandatory capital buffers above regulatory minimums that scale with increasing concentrations.
These statements by Mr. Long exemplify a regulator philosophy that is likely to pervade the implementation of Dodd-Frank and the regulatory environment going forward. Regulators seem to be happy to put the Congressional focus on their role in the financial crisis behind them and eager to position themselves within the new supervisory landscape. In case of the OCC, although it will be gaining federal thrift supervision authority under this new framework, it will also have to work more closely with the Fed in regulating banks held by systemically risky bank holding companies. Long’s comments assume an interagency approach to bank supervision.
Mr. Long was appointed by then-Comptroller John Dugan to his current post in 2008, in which role he also serves as Chief National Bank Examiner and as Chairman of the Committee on Bank Supervision, which coordinates the OCC’s supervisory activities. He has been with the OCC since 1979.