The Nuns With Guns

Credit: Zerohero

Recently the Wall Street Journal ran a series of articles on the present state and potential future of banking.  One of the most intriguing articles in the series was one entitled: Nuns With Guns: The Strange Day-to-Day Struggles Between Bankers and Regulators. 

"The sobering reality of banking in 2016 is that lenders are awash in new regulations; and growing armies of rule-interpreters and enforcers -- for good or ill -- are bringing striking changes to banks' internal cultures."

The article goes on to note the significant hiring of new staff on the part of both banks and bank regulators to deal with the flurry of new regulations.  It also explores some of the psycho-dynamics that occur between front-line bankers and their own bank's internal compliance staff; and further, between both of those groups and the examiners from the multiple government regulators that may have jurisdiction over the bank or some segment of the bank's operations.  

Reportedly, in an exercise conducted during one Barclays PLC employee town hall, front-line bankers and bank compliance executives shared images of how each group thinks of the other.  Front-line bankers were viewed as "cowboys on horses with guns", while compliance executives were viewed as "nuns carrying guns".

The article was a public airing of an often unspoken and usually cloaked aura of tension that suffuses many of the relationships between these three groups today.  The Journal gave us all a quick peek at several internal banking business cultures that are characterized by anxiety, wariness, guarded comments, and over-cautiousness.  Business cultures which, in turn, exhibit a lamentable (and costly) hypersensitivity to both formal and informal communications with government regulators and internal bank compliance staff.

One particular sentence from the article speaks volumes about the situation: "Bank executives largely avoid publicly voicing frustrations with the regulatory regime, and most wouldn't comment on the record for this article."

This backdrop of hypersensitive preoccupation goes well beyond the set of bank operating deficiencies that rise to the level of being cited as Matters Requiring Attention (MRAs) by examiners.  MRAs are "must-do" priorities that obviously must be rectified in a timely manner by the bank.

No, that hypersensitivity even kicks in when there are informal recommendations and off-the cuff observations made by bank examiners.  Chalk it up to free-floating anxiety alluded to in the Journal article.  That anxiety results in resigned acquiescence by front-line bank staff which then prompts "abundance of caution" remedial actions on the part of the bank (with their associated financial expenditures).  These "nice-to-do" remedial actions, in turn, drive up industry-wide compliance costs much further than is really necessary.

And if that, by itself, was not enough; fanning the flames even more are my colleagues in the bank consulting tribe:

"You think compliance costs are high?  Well, they pale in comparison to the civil fines and costs to your reputation of non-compliance!"

This aura of tension and banker hypersensitivity seems, to me at least, to be the inevitable fallout from the fervid bank regulatory agency enforcement postures spawned by the 2008 financial crisis.  

The Evolution of Enforcement Postures

I lived through the financial crisis as a regulator and as part of the team that set up the initial operations of the U.S. Treasury Department's Troubled Asset Relief Program (TARP).  And I fully appreciate that the public's vocal demands for accountability, for both regulators and bankers, forced a re-evaluation of historical banking agency enforcement practices.  Agency enforcement activities moved from a policy of patient, calibrated escalation (beginning with moral suasion), toward a less tolerant, incident-driven policy of  "you've got one bite of the apple".

At the same time, the banking agency enforcement action decision-making process was being moved further from field offices and progressively centralized in geographically-remote district, regional, or headquarters locations in a trend that conflated the industrial concept of uniformity with the more custom-tailored concept of consistency.

Remote decision-makers, who have not had direct connection with the banks (and bankers) involved, tended to avoid the risk of giving bankers the benefit of the doubt on the close calls.  That's just a natural distance bias.  Plus, at the end of the day, regulators rarely get criticized for being too tough or conservative in their decision-making.

Like Agatha Christie's Murder on the Orient Express, where no one person committed the murder in question; no one or two items are expressly responsible for the evolution of the internal bank cultures explored in the Journal article... but the two I mentioned above are strong contributors.

But I will say this, unequivocally.   The enforcement environment has succeeded in frightening community bank boards of directors.   More often than not, community banks choose the costlier path of least resistance: "just do what the examiner suggests."

It is difficult to broad-brush this issue as many talented individuals, in both bank compliance departments and in the bank regulatory agencies, use their exceptional people skills to successfully manage through this issue and promote positive and productive relationships.  These people really mean that a "recommendation" is truly a recommendation, and a voluntary action... not a stealth requirement.


The Dangers of Regulator-focused Banking

I've explored the dangers of regulator-focused banking a few years ago:

" Historically, as a bank regulator and bank examiner, your job was to calmly officiate in the marketplace for banking services.   As a member of a rule-making body, subject to statutory guidance and notice-and-comment rule-making, you helped establish the dimensions of the ball field and rules for player behavior.

 In your day-to-day job as a bank examiner, you were also an umpire or referee on the field who monitored player behavior, called out-of-bounds play, and penalized some for personal fouls.  And as a corollary part of the job of officiating, you sometimes had to sideline someone from the field of play or, in grave situations, ask the Federal Deposit Insurance Corporation (FDIC) to carry an ailing player off the field on a stretcher.  

The game itself, though, was played by teams of bankers, doing what bankers do well --- making a visible contribution to a safe, sound, and prosperous banking system that is earnestly attending to the legitimate credit needs and healthy growth of the most powerful economy on Earth.

Like any sports competition, the fans show up to the game to applaud the performance of the players on the field and appreciate the quality of the game play.  Every fan knows that when the game's center of attention becomes the officiating, there is something grossly wrong with the game." 

Banking Industry Responses

Owing to the increased regulatory overhead and this notable hypersensitivity to communications from bank regulators, we are seeing at least a couple of reactions.

First, all across the United States, bank boards of directors are being stocked with former regulators to help boards navigate the psychology of the regulatory and bank supervisory process.  The practice is becoming more and more common.

Second, banks are steering their consulting needs toward consulting firms whose staff roster contains a healthy number of former regulators, particularly those higher-profile ex-regulators, who walked the beat in their respective agency's Washington, D.C. headquarters.

We have seen a similar phenomenon in the defense-industrial complex, where former executives of the Department of Defense join the upper echelons of large defense contractors in order to help them understand the "process" and to leverage previous personal relationships so as to better compete for lucrative government contracts.

But the big difference between this phenomenon as it is manifest in the defense industry, versus the banking industry today, is that in the defense industry, it is in the pursuit of financial gain, not the avoidance of pain.