GonzoFreaks, surely you saw the article in American Banker about California’s state banking regulator, the Department of Financial Institutions (DFI), implementing a CAMELS system to be used by financial institutions to grade their examiners. You read that right; they’re implementing a full-blown CAMELS system with a similar 1 (Very Satisfied) to 5 (Very Unsatisfied) rating scale now commonly used by examiners to summarize bank safety and soundness (S&S).
After the exam, according to DFI’s glitzy August 2004 Monthly Bulletin, bankers can log on to DFI’s Web site, rate their “exam process” (re: rate their lead examiner) and play a vital role in improving the service provided by the ambitious DFI. Then the results will be aggregated and published on DFI’s Web site every quarter. On the surface, this sounds like a regulator trying to improve itself, yes?
No. Let’s be frank here, shall we GonzoBankers? This is a transparent PR move by Schwarzenegger’s DFI to puff its chest, spin itself as an outreaching, concerned regulator and just maybe keep the state’s banks and de novos from turning to the increasingly popular national charters. Can’t you just see the department’s PowerPoint presentations, with the governor’s smiling face in the header, showing the examiners’ ratings over time inching ever closer to perfect, across-the-board 1’s? It is so patently obvious that it’s hard to believe they made this announcement without a 🙂 or a 😉 at the end of the newsletter.
I don’t buy it. If I have this straight, DFI wants to be the best darn regulator alive in the entire world, heck, the entire universe! Is it going to use bankers’ ratings to measure this? How will DFI define its goal of becoming “the pre-eminent state financial services regulator in the country” as it states right there on the survey? If I’m reading the unwritten correctly, DFI’s looking for lots of 1’s and not many 5’s. That’s the assumption I made when writing this article, and that assumption was confirmed this morning by a DFI rep familiar with the new CAMELS survey process and goals.
It sounds as if the agency considers banks, not the state’s public, its constituents. I’m not suggesting that regulators do not have responsibility in their supervision of our banks and bankers; they most certainly do. There are many fair, educated, rational examiners, but there are also some cowboys who will not hesitate to put the spurs to bankers just to advance their own careers. There is some merit to a regulator seeking feedback and reacting to it. Publishing the results while pushing for 1 ratings, though, smacks of self-promotion.
Once again I take you back to the trust issue that banks must manage. I still contend that banks’ greatest asset is the trust that the public has in our banking system. Like it or not, the public’s knowledge that bankers are being supervised/regulated/audited is an integral component of that trust equation. Regulation is at times an unwieldy ball and chain that unreasonably anchors bankers to their desk chairs, but regulation also buoys the public’s confidence in our banking system. Before the public trusts us with trillions of their hard-earned dollars, they need to know that someone is looking over our shoulder; it is that simple.
Keeping that in mind, what is the public going to think when DFI starts publishing what will undoubtedly be ever-improving scores from their licensees? I mean, if DFI is going to PUBLISH the results, wouldn’t you guess that DFI will lean on its examiners to go a little lighter on its banks when there’s a borderline call? You bet it will. It happened more than once in my time with the OCC when the agency was being accused publicly of being too harsh with bankers.
So over time DFI will show how responsive it is to bankers, how reasonable and consultative it is, how strong its bankers think the examining force is under the categories: “Competent, Advisory, Meaningful, Efficient, Listening and Strong Leadership” – kinda like Boy Scouts without the tassels on their socks.
I see the hip billboards already… with the snappy-dressed examiners, all in shirtsleeves and fashionable eyewear, gathered around the boardroom table with concerned yet compassionate facial expressions: “We’re DFI – and Bankers Dig Us!!” Or maybe, “DFI – To Bankers it Sounds Like Deify!” With big-time corporate fraud cases capturing more headlines than the latest Paris Hilton bootleg release, will the public feel more comfortable – more trusting – of our banking system when it hears that the bankers and the regulators are such good buddies? No way.
I wonder what grades Riggs Bank management gave the examination process in the OCC’s version of the post-exam review when R. Ashley Lee was the lead examiner? As one knowledgeable friend of mine said, “I don’t see a benefit to the public for a regulatory agency to receive a good score for ‘working well with others’ from the people it regulates. I’m thinking that if the industry gives its regulator a high grade, there’s the strong possibility of an independence issue. So, probably a low passing ‘C’ or high ‘D’ average reflects a healthy level of independence. Bottom line… it’s always ugly when any group climbs into bed with their regulator.” That’s a true statement; I’ve seen the videos.
Don’t get me wrong here. The public wants and needs CAMELS 1 examiners; it just doesn’t want examiners concerned about being rated CAMELS 1.
One way DFI’s new published rating process could make sense and even conjure up a sniff of credibility would be to publish aggregate bank S&S rating trends alongside the examiners’ ratings. What if the public learns that there is a direct relationship over time between the two ratings? Are the examiners becoming more effective, educated and grounded, providing sage advice chock full o’ industry best practices, and thus helping to improve banks’ safety and soundness? (I saw that situation occur more than a few times in my short and admittedly inglorious stint as an examiner.) Or would the cynic in us all whisper that there is some mutual back scratching going on here? Maybe the unfortunate public perception would be that the banks’ S&S ratings are rising BECAUSE the banks are rating their examiners highly. Now DFI has created a lively conversation, a debate rather than a spin session.
Or, on the other hand, what if over time the agency sees an inverse relationship between their banks’ CAMELS ratings and the examiners’ ratings from the banks? The tougher and more heavy-handed the examiners are, the more safe/sound the banks get. (As a fed I also saw the strong-arm tactic work wonders on some seriously scrawny banks.) Publish those results? I’m not sure how well that would promote DFI’s stated goal of becoming the best damn bank regulator, period, but the public would have some interesting material over which to gnash its teeth and bicker.
Another friend of mine, an attorney at a world class bank by anyone’s definition, is a proponent of DFI’s program and likened it to rating one’s professors at the end of the term. My friend is a helluva lot smarter than I am, but I see a difference in that the professorial ratings are typically done anonymously, and even if they are not, usually you do not have to be graded by that professor next year after she’s read your critique of her.
Bankers are not so naïve as to think that their lead examiner will not see the post-exam ratings assigned to them. Some bankers, a very unwise few, will simply not care and shoot from the hip. They’ll thrash an examiner when they think a thrashing is due, and more power to ‘em. Most, however, will know that giving the professor an “F” at mid-term might just affect their own final grade.
Look, I’m all for forcing more sensibility in the sometimes misguided regulatory process, for weeding out the self-promoting loose cannons, for squashing examiners who wield their power from an uninformed, uncaring or vindictive position, for insisting upon pristine accountability in a regulatory wringer that daily puts bankers’ jobs on the line. But DFI’s plan as I see it will only encourage chummy relationships and false back slapping that will in the long run chip away at our industry’s most valuable asset, the public’s trust. Then again, hell, maybe DFI truly is just trying to improve. Maybe it’s just the publishing of the results that makes it seem so smarmy. I’m just a snot-nosed consultant living in a desert never meant to be mass-populated, but this DFI plan just seems a little on the misconceived side to me.
Ahh….feeling good, angry and right again, GonzoBankers.