The Federal Reserve’s point man on banking regulation warned Monday that some banks do the bare minimum required to monitor risk, warning that companies can acquire a “culture” of bad behavior.
Speaking at a conference about Wall Street in New York, the Fed’s Daniel Tarullo also said his agency needs to be willing to use its powers to bar bad actors from banking if necessary to dissuade inappropriate risk-taking.
Tarullo, who leads the Fed’s management of regulatory policy, said that some banks view the process of improving their risk-management practices and capital planning as a “mere compliance exercise.” Since the Fed began stress-testing banks in 2009 to see whether they could withstand a crisis, Tarullo said, he has noticed that some banks “address the deficiencies identified by the Fed in a discrete, almost check-the-box fashion.”
He noted that other companies have internalized regulators’ recommendations for avoiding dangerous practices but expressed concern that banks too often act to maximize profits as long as they’re not doing anything technically illegal, and that the management communicates that the firm has no customers or clients, but only trade counterparties.
Bank compensation also can lead employees to prioritize short-term profit ahead of long-term safety, Tarullo said, noting that a provision of the 2010 Dodd-Frank financial reform law intended to overhaul compensation practices hasn’t been finished.
To prevent companies from encouraging undue risk-taking, Tarullo suggested that the government can bring criminal charges against individuals who engage in “egregious bad behavior.”
Critics of Wall Street have blamed the Obama administration and the Fed for not bringing more criminal cases against bankers in the wake of the subprime mortgage crisis. Tarullo addressed those criticisms by noting that bank regulators don’t have the power to bring criminal prosecutions, but do have the authority to force banks to remove employees who misbehave. It is “important that we be willing to expend the resources to initiate such actions in appropriate cases,” he said.
But even that is not likely to appease his critics. Sen. Elizabeth Warren, D-Mass., grilled Tarullo at a September Senate hearing over the lack of criminal prosecutions for bankers, asking if the Fed had referred any cases to the Justice Department.
Noting that regulators’ referrals led to hundreds of convictions of financial company employees in the savings and loans crisis of the 1980s and 1990s, Warren told Tarullo that “the main reason we publish illegal behavior is for deterrence, to make sure that the next banker who’s thinking about breaking the law remembers that the guy down the hall was hauled out in handcuffs when he did that.”
