That Time Federal Bank Examiners Were Told to Play Nice

The latest in an intermittent series looking back at groundbreaking, newsmaking, appalling and amusing events in government history.

Today we’re going to turn the clock back a whole five years, to 2018. It was the second year of the Trump administration, and 10 years after the financial crisis that devastated the U.S. economy. That meant a decade of stricter enforcement of financial regulations and stepped-up oversight of banks.

The time had come, Trump administration officials and GOP lawmakers decided, to ease up on financial institutions. That meant a series of policy changes, starting with overhauling the Dodd-Frank Act, which had boosted banking oversight in the wake of the 2008 financial crisis. Regulatory measures to ease the burden on banks followed.

But the effort didn’t end there. Randal Quarles, then the vice chairman of the Federal Reserve for supervision of banks, wanted an overhaul of the Fed’s process of supervising bank operations, which he called “inherently more judgmental, nuanced, discretionary, variable and opaque than the practice of regulation.” 

Quarles backed systemic changes to reduce the space for judgment and discretion that Fed supervisors had exercised in the course of doing their jobs. That involved nothing less than a thorough culture change in the banking oversight system. It boiled down to one key principle: Be nicer. Apparently, not only did bankers chafe under the post-2008 regulatory apparatus, their feelings were hurt by toiling under the watchful eye of federal bank examiners. 

“You would meet with the bank regulators and it felt like it was us versus them,” an American Bankers Associations executive told The Wall Street Journal in late 2018. 

Quarles made a priority of changing that culture. It “will be the least visible thing I do and it will be the most consequential thing I do,” he told the Journal. “The banks should feel that their supervisor is going to be firm but fair.” He told examiners that their reports shouldn’t just focus on banks’ weaknesses, but give them positive feedback as well. 

"The coach is demanding as much as ever from the sidelines—it’s just that every now and then he’s throwing some ‘Good job!’s and ‘Way to go!,’” said a former bank supervisor after Quarles announced the new approach.

The culture change was more than a surface-level effort. It involved redefining how overseers’ viewed their jobs. The challenge of achieving that goal is illustrated by a 2014 exchange at a Senate hearing between Sen. Elizabeth Warren, D-Mass., and New York Federal Reserve President William Dudley. In her view, Warren said, federal regulators were “the cop on the beat. That is, they are out there to look for illegal and unsafe conduct.” Dudley begged to differ, saying a regulator should play the role of “fire warden,” making sure that each bank “is run well so that it is not going to catch on fire and burn on.” 

Cop and fire warden are two very different visions of what regulators should be. But they’re both a far cry from coach. 

Quarles knew demanding a change in culture would require a personal touch. So he and Federal Deposit Insurance Corporation Chairman Jelena McWilliams spent months in the latter half of 2018 crisscrossing the country, visiting regional offices of their organizations to describe their vision of a kinder, gentler bank supervision system. In a world ruled by facts, figures, and metrics, Quarles and McWilliams had stepped into the murky world of traditions, habits and values. “All of this will be difficult to quantify except by air miles,” Quarles told the Journal.

Did he ultimately succeed in changing the culture of bank supervision? And did that contribute to the fall of Silicon Valley Bank and the overall current shakiness of the banking system? Since those questions can’t be answered quantitatively, it’s hard to judge. Even if Quarles did achieve his goal, he argues that period is ancient history. “I gave up the reins as vice chair for supervision a year and a half ago,” Quarles told The New York Times this week.

It’s often said that culture change is extremely difficult in the federal context, and it does require determination and sustained commitment. But in one sense, it’s easier than in other sectors of the economy. Career federal employees, including bank supervisors, are accustomed to seeing political overseers come and go, and they are expected to change their approaches, techniques and actions to suit the new team’s agenda. The best of them are very good at it. So if a new leader demands culture change, he or she just might get it. And it just might stick until someone else comes along and makes changing it again a priority.