The Office of the Comptroller of the Currency recently graded the 19 largest national banks on five factors designed to gauge how well they are being run.
The results are startling.
Not a single bank met the OCC's requirements for internal auditing, risk management or succession planning. Only two of the 19 banks met the regulator's requirements for defining the company's appetite for risk-taking and communicating it across the company. Only two banks were judged to have boards of directors willing to stand up to their CEOs.
This miserable picture was painted by OCC leaders last month at a closed-door conference for large-bank directors. I obtained a copy of the presentation materials and I asked the OCC to help me understand them.
In an interview Monday, Mike Brosnan, an agency veteran who now leads large-bank supervision, walked me through the progress bankers and examiners alike have made over the last two years. He is confident that the next year will bring marked improvement.
"I'm satisfied with where they have come from, and I like the momentum," Brosnan says. "I think we're at a C-plus/B-minus point, and what we are looking to get to is B-plus or A-minus. We are not looking for A-plus."
Brosnan predicted each of the 19 banks will meet the agency's thresholds in at least one of the five categories by July.
"All these are motherhood and apple pie, but they are really hard to do," he says.
Hard indeed. According to the conference materials, the number of outstanding "matters requiring attention" at the 19 banks stood at 1,083 on Sept. 30, which works out to an average of 57 separate problems cited at each bank.
Brosnan stressed that national banks are being held to higher and tighter standards than ever before. "We've raised the bar significantly."
After the 2008 crisis, Brosnan and his colleagues at the OCC did some serious soul searching and concluded that the same mistakes that have bedeviled banks for decades did them in again: lousy loan underwriting, overleveraging, rapid growth and asset concentrations. Brosnan also faults the regulators, including himself, for missing the obvious.
"We don't have anything to hide behind. This is all fundamental stuff," he says. "Let's not kid ourselves. We got beat the old-fashioned way."
Determined not to get beat again, Brosnan's mission is nothing if not bold. He wants to restore the industry's — and the OCC's — reputation.
"I want the banking system to be valued again and to be recognized that it is a key component to growth," he says. "Also, the supervision of the large banks has to be trusted again."
To do that he's turned the large-bank supervision model inside out. Rather than putting the primary focus on credit, liquidity, interest rate and price risk, Brosnan has the OCC's large-bank examiners targeting operational, compliance, strategic and reputation risks.
"For the first time in my life, we actually say this basket of risks is more important, and more of a priority for the system to deal with, than" asset quality, liquidity, interest rate risk and trading activities.
"It's weird," he admits. "It makes us uncomfortable as examiners, because it's not how we were trained."
Brosnan is an even tougher grader when it comes to his own team. He gave most banks a C-plus or B-minus but gave the Comptroller's Office only a C.
"Fixing capital, reserves and liquidity is much easier than what we're fixing now, which is governance and oversight," he said.
Among the five governance areas being targeted, risk management and audit are getting the harshest eye. "We determined that for these 19 banks, their audit and risk management functions had to be elevated from wherever they were to meet our definition of 'strong,' " Brosnan says.
None of the banks have met that standard for audit; 10 banks are within a year of meeting it while the nine remaining banks will need up to two more years, according to the materials the OCC disseminated at the conference. (The OCC did not identify any of the banks by name.)
None of the banks have met the risk management standards either. Four are within a year and 15 of the banks are going to need up to two years to pull their systems up to snuff, the OCC says.
The OCC also wants bank boards of directors to provide a "credible challenge" to senior management.