The regulator of the biggest financial institutions in the United States emerged from the sausage factory of Civil War politics in 1864. It exists today as a creation of bank lobbyists who were particularly close to Treasury Secretary Salmon Chase.
That regulator, the Office of the Comptroller of the Currency, is one of those mostly obscure federal bodies that has a big impact on Americans’ financial lives. Unlike a lot of the alphabet soup of federal agencies, its name, for historical reasons, doesn’t describe what it does today. But it is powerful.
The Comptroller set a lot of the rules that Marcus Green, a New Orleans resident, had to live by in 2018 when JPMorgan Chase wrongfully foreclosed on his modest home he’d just repaired, even though he never missed a payment on his mortgage. When Warren Nyerges of Naples, Fla. got a notice from Bank of America that he was losing his home, even though he’d never borrowed money from them, the Comptroller was the regulator that let that happen.
The agency has also overseen Wells Fargo during its multitudes of scandals, including manipulated overdraft fees, fraudulently opened checking accounts, and auto loans padded with unnecessary insurance. Even if you bank with regional firms like Fifth Third or U.S. Bank, or more recently, if you borrow from little known, perhaps skeevy, lenders online, the Comptroller is your silent, industry-friendly regulator.
President Biden is currently pondering whom to nominate as the Comptroller of the Currency. Two candidates have been floated: Michael Barr, a law professor from the University of Michigan who previously served at Treasury, and Mehrsa Baradaran, a professor at the University of California who is an expert in racial discrimination in financial services. Both have their merits, though Baradaran would represent a more decisive break from the Obama era, something progressives are seeking.
Merge with the OCC
But we should also consider a more radical and simple solution to that bad spawn of the Lincoln administration: make the eventual nominee the last Comptroller of the Currency. Instead, merge the OCC into a regulator with a far better track record, the Federal Deposit Insurance Corporation (FDIC), the primary regulator of the small institutions that make up the vast majority of the country’s roughly 5,000 banks.
If we subsume the giant banks in a sea of small, we can take a step toward taming bigness, a prescription that would suit wide swaths of the American economy. The FDIC, a New Deal creation responsible for protecting Americans’ savings, and fortifying trust in the financial system, paved the way for a half-century of financial stability and a financial system built around the needs of consumers. It can help do so again.
Tom Curry was appointed Comptroller General in 2010. He faced the wreckage of the financial crisis and tried to reform the agency, with a particular focus on deterring coziness between examiners and the banks they oversee. Now, after seeing Trump appointees shred many of his accomplishments, he leans toward abolishing his old job.
“I warned that if there was not reform, there would be pressure for the agency to be abolished or merged,” Curry said. “I’m not yet there. I’m tilting that way.”
The Office of the Comptroller (OCC) ‘s persistence for over 150 years is partly explained by our misunderstanding of it. In the fragmented world of banking regulation, in which assorted state and federal agencies play a role, the OCC is less a regulator than a big-bank trade association embedded in the federal government – a lobby with the power to write its own rules.
Enabling Monopoly Power
The OCC has enabled big-bank dominance, monopoly power, new forms of financial predation, and political corruption. That it started under the Lincoln administration in 1863, the same year as the Emancipation Proclamation, doesn’t mean it deserves absolution. We can do better.
The OCC’s purview is over national banks, so-called because they are chartered under the National Bank Act, signed by Lincoln in early 1863, by the federal government, not by states, as had been the case previously. Congress approved the creation of this chartering function with a purpose that had little to do with banking; it was financing the Union armies, then still months away from victory at Gettysburg, a decisive turning point in the Civil War two years away from finally crushing the slaveholder rebellion.
At the time, banks were state-chartered companies. Their business was not corralling deposits and lending but instead issuing banknotes. Backed by the bank’s core capital, those notes were used as currency. The antebellum United States ran on banknotes. Specie (gold and silver coin) existed, but banknotes lubricated commerce in a way that metallic money never could. This froth-inducing system of banking and money – banknotes numbered in the thousands, and many were brazen frauds – boomed. It also fell apart numerous times and was instrumental in financing the slavery-based economy of the South.
Congress seized on the national bank idea to finance the war, which had depleted federal coffers and driven heavy borrowing to the point where capital markets were tapped out. The idea of a fiat currency was still mostly beyond the pale. What to do? Instead, Congress created federally chartered banks, taxed state banknotes out of existence, and forced the new national banks to invest their reserves in U.S. government bonds, which at a stroke created a massive new financing source for the war. But it also created new, powerful banks. Banknotes issued by these national banks became a de facto uniform means of payment – hence the “currency” in the OCC’s name today.
Corrupt at the Creation
Beneath the noble cause of preserving the Union lay a far less altruistic motive. The appeal in New York, Philadelphia, and Boston, then competing financial centers, lay in creating national banks whose small-fry state-chartered competitors would be taxed away. (They did not anticipate the persistence of state banks, which learned they could profitably collect the deposits of small savers – checking and savings accounts – and lend to local businesses.) In short, the very existence of the big owed itself to the attempted extinction of the small.
It should come as no surprise, therefore, that the passage of the National Bank Act is a study in breathtaking corruption. In particular, the law owes its existence to a friendship between Chase, the Treasury secretary, and the lobbyist brother of Jay Cooke, the Philadelphia financier who grew still richer peddling federal bonds to small savers during the war. (Secretary Chase didn’t found the famous bank, but the Chase National Bank, the forerunner of Chase Manhattan, was named in his honor in 1877.
The Cooke brothers planted newspaper articles supporting the bill and circulated them to congressional offices to imply public support for the idea. They also lobbied key members of Congress, notably Sen. John Sherman of Ohio, whose candidacy they had supported financially and sat on a key committee. A set of amendments to the law brought previously hostile New York banks on board by offering them the sweetener of greater power over smaller rivals. Sen. Carter Glass, the Georgia Democrat who would later lend his name to the Depression-era law (Glass-Steagall) breaking up big banks, would later call the system “a breeder of panics” because of the power it conferred on large banks.
Whatever else we think of Lincoln, financial concentration fell squarely within the worldview of the Republican Party of the time. Lincoln had come up in politics as a Whig and believed in a robust central bank and a strong currency; President Andrew Jackson disagreed and brought about the destruction of the Bank of the United States. By the time he occupied the White House, Lincoln saw no merit in revisiting these bitter debates. He was persuaded that the national bank structure would create a kind of distributed central bank overseen from Washington.
A Legacy of Lincoln
Lincoln called for the law in his 1862 annual address and warned against the danger of fiat currency. It was a close-run thing, passing the Senate by a vote of 23-21, on the strength of the argument of wartime necessity, and Lincoln was, unusually, intensively involved in the arm-twisting to secure the votes. We could reasonably interpret this law as a settlement of the Jackson-era debate around a central bank firmly, though not entirely, on the side of big finance—under the cover of patriotic duty.
If logic and good governance had anything to do with it, federally chartered banks should have vanished by 1913. The years between the Civil War and the creation of the Federal Reserve that year had seen one bank panic after another. Congress created the Fed, the first in a series of steps extending through to the New Deal, that sought to tame financial turbulence. The Fed’s creation obviated the need for private banknotes; a truly national currency in the form of Federal Reserve notes, still backed by gold, took shape.
“National banks have always accounted for a strong majority of the largest banks, and they have had powerful defenders,” said Arthur Wilmarth, a professor of law at George Washington University and a longtime critic of the OCC. “I think their survival is a matter of political influence more than anything else.
The malfeasance of the OCC before, during, and after the 2008 financial crisis is well-documented. Most notably, the OCC prevented states from probing the big-bank role in the housing crisis as foreclosures rose sharply in 2007 and then refused to undertake its own investigation. Later it would whitewash the infamous robo-signing scandal, in which banks forced through foreclosures with fraudulent documents with a bank-driven review. Consumer lawyers, not the OCC, uncovered that scandal, and it took 50 state attorneys general to force at least some real accountability.
A Modern Big-Bank Advocate
There is likewise no shortage of material on the corrupt turn of the OCC under the Trump appointees who got to work doing favors for banks as soon as Curry left. Trump’s first Comptroller was a MAGA-hat-wearing bank lawyer named Keith Noreika, appointed as a placeholder until Joseph Otting, a crony of Mnuchin’s, was confirmed. Otting’s top priority was gutting rules designed to encourage investment in underserved communities (the Carter-era Community Reinvestment Act), a law he’d run afoul of as CEO of OneWest, a bank that got a juicy bailout during the crisis.
But along the way, he also discarded the reforms that the Obama-appointed Curry set in motion, notably a plan to rotate examiners in and out of big banks to avoid their becoming too friendly with those whom they oversee. Otting also rewrote rules to allow banks to partner with predatory lenders nationwide and outflank state usury laws, drawing a still-unresolved lawsuit from state attorney generals.
But to criticize these steps alone is to miss the structural problem of the OCC and why big banks gravitate to its lax regulation. Former Federal Reserve Chairman Alan Greenspan, in one of those artlessly honest moments that self-professed libertarians often stumble into, gave the answer: because they can.
“The current structure provides banks with a method . . . of shifting their regulator, an effective test that provides a limit on the arbitrary position or excessively rigid posture of any one regulator,” Greenspan said in 1994. “The pressure of a potential loss of institutions has inhibited excessive regulation and acted as a countervailing force to the bias of a regulatory agency to overregulate.”
The American system for chartering banks is a patchwork; states still authorize banks alongside the OCC, and the FDIC has secondary authority for supervision – the physical examination of bank records – for all banks. Banks get to choose, a phenomenon called “regulatory arbitrage.” Bankers and their allies in government like to speak reverentially of this “dual-banking system” – neatly forgetting the wartime exigencies behind its creation – but if all it does is give big banks greater room to maneuver, then let’s dump it. Think for a moment if we created multiple court systems to ensure that bank robbers would have the option of swapping out a tough prosecutor for a more friendly one. Would bankers be so enthusiastic?
In 2004, JPMorgan Chase, now the largest U.S. bank by assets, and HSBC both abandoned their New York charters in the wake of federal rules that expanded the reach of state laws on predatory lending. More recently, Cincinnati-based Fifth Third swapped its Ohio authorization for the OCC in 2019, the sixth firm to do so under Trump’s industry-friendly Comptrollers. Another was the U.S. affiliate of Mitsubishi UFJ, which was under investigation by New York regulators, who had to abandon their probe once the OCC became the chartering authority. A vital variable: when the banks switch to the OCC, they then pay dues to that agency, further reinforcing its power.
This ability to attract banks by offering more lax supervision and friendly rules—Otting openly referred to banks as his “customers” rather than his charges—gives the OCC the power, among federal banking regulators, to drive the agenda for all of them. Wilmarth, a longtime critic of the OCC, sketches out in his new book, Taming the Megabanks, how the agency effectively forced other regulators to allow banks into the wild-and-wooly derivatives market and stifled early attempts to crack down on shady mortgages. Previous comptrollers have then sped through the revolving door. John Dugan was a Republican staffer in the U.S. Senate who became OCC head under George W. Bush; he’s now the chairman of Citigroup. OCC examiners regularly exit to work for the banks they oversee.
The OCC enables financial consolidation at a time when we need a whole-government approach to shrinking these behemoths. The five largest U.S. banks – JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and U.S. Bank, hold about 38 percent of all deposits. The Financial Services Forum, a lobby group compose of CEOs, likes to brag that its eight members handle three-quarters of all debt and equity underwriting. The OCC also has a long history of using its powers of preemption – the ability to override state laws – to undermine consumer protection laws. (Noreika, relying on OCC rules, successfully sued states on behalf of big banks to stop regulation of ATM fees.)
And the big banks remain, contrary to all that’s been done in the last ten years, still enjoy an implicit guarantee from the federal government that they’ll be bailed out in the event of another financial crisis. They are still too big to fail, as former Treasury Secretary Tim Geithner, no pitchfork populist, admits.
Advocates for big financial institutions seldom have much of an argument for why bigness is itself good. Sure, you might get lower ATM fees if you want to get cash in Paris, but that’s a contractual arrangement not intrinsic to large banks, and, in an era of credit cards and Apple Pay, it sounds like a hoary pitch for traveler’s checks. Paid shills will rattle off statistics about how large banks dominate lending to the small as though that’s a virtue. Why endorse that kind of power imbalance?
Fight Big with Small
At a time when the body politic has a rising appreciation of monopoly power that has built up in many sectors of the American economy, there’s a strong case for breaking up these behemoths, as Senator Elizabeth Warren and many others advocate. There is no economic case for reinforcing the sway of the biggest banks and certainly no reason that should remain under the purview of a regulator with such a clear track record of doing their bidding. A better way would be to fold the OCC into the FDIC, whose institutional imperatives are not to be an advocate for big banks but a steward of the system.
The “I”—for “Insurance”—in FDIC is no joke. It is the guarantor, the insurer, of deposits in the banking system, advertised by the small plaque you see in every bank. It oversees the deposit insurance fund, the pot from which ordinary customers are paid in the event of a failure and collects bank contributions to the fund. That creates a culture of caution in the agency and a skeptical eye at big concentrations of deposits whose endangerment would deplete the fund.
“Where are the economic interests aligned?” says Sheila Bair, a Bush appointee who chaired the FDIC during the financial crisis and is a veteran of the Treasury Department. “No regulators are perfect. But the FDIC has the strongest record because it’s not captive to big banks for its funding,” Bair said. “And it has exposure to bank failures.”
A JPMorgan Chase within the ambit of the FDIC would also disrupt the modus operandi of the OCC in which complaints by big banks to their regulator generate a knowing nod. Most of the FDIC’s “customers”—its leaders are not known for thinking of banks that way—are much smaller banks, whose focus on deposit-taking and commercial and industrial lending embodies what the real economy needs.
Even better, decades of bad blood between well-organized community banks and a small number of megabanks could be a helpful tension within an FDIC that also oversees the OCC’s current charges. Jamie Dimon, the CEO of JPMorgan Chase, once called the top lobbyist for small banks “a jerk,” a potent reminder that the small are willing to stand up to the Wall Street giants
Perhaps most importantly, abolishing the OCC would be a victory for democracy, an acknowledgment that concentrated financial power deserves, least of all, to have its own special advocate built into the federal government. Maybe in the process, Congress would find bank-breakup legislation wise as well. And taken together, those two steps would end the federal government’s terrible century-and-a-half experiment in enabling and defending big and powerful banks. Abolishing the OCC would, at the very least, clean up Lincoln’s enduring mistake