New Candidate for Chief U.S. Banking Regulator Sees Risks in Crypto and Fintech

[ad_1]

The Biden administration is selecting a new candidate for the post of chief banking regulator after dropping two previous choices due to a brawl within the Democratic Party. If the candidate – Saule Omarova, professor of banking law at Cornell University Law School – is appointed to head the Office of the Comptroller of the Currency and gets Senate support, Wall Street’s biggest banks can look forward to a relationship. less warm with her than they had had her. with its recent predecessors.

President Joe Biden’s aides are in control of Omarova, and the process is still in its early stages, said two people familiar with the matter, who were not authorized to speak publicly. She could be nominated in the coming months or early next year, people said. She would then need confirmation from the Senate for a five-year term.

White House and OCC spokespersons declined to comment.

Omarova is seen as less controversial than the two previous candidates for the head of the agency, which is little known outside the financial sector but has recently gained prominence – especially among Democrats who see banking regulations as a remedy. to growing racial and economic disparities, both Biden’s priorities.

The first candidate, Michael S. Barr, an official in the Obama administration, has drawn criticism from progressives who said he was too deferential to the banks when negotiating the Dodd-Frank regulatory package after the crisis financial 2008. And Mehrsa Baradaran, a banking law professor who was a favorite of progressives, has come under attack from supporters of Barr for his lack of management experience and support of moderate Democrats. Both were dropped after administration officials concluded that neither was likely to garner enough support to be confirmed.

Omarova, originally from Kazakhstan, was Special Advisor for Regulatory Policy in the Treasury Department under President George W. Bush and, prior to that, worked for five years at the Davis Polk & Wardwell law firm.

Although she kept a low profile, her academic writings offer some insight into how she might approach the job. She highlighted the growing risks for banks to embark on the cryptocurrency industry, which has experienced explosive growth but remains a digital Wild West. Cryptocurrency trading, she argued, could allow banks to conduct more trading activity out of sight of the Federal Reserve and other regulators.

As a controller, Omarova could seek to strengthen OCC oversight over these companies, which banks such as JPMorgan Chase and Citigroup are building. Already, the Securities and Exchange Commission is seeking to strengthen its oversight of cryptocurrency markets, its chairman, Gary Gensler, said in a recent speech.

JPMorgan, the country’s largest bank by assets, has introduced its own digital token, JPM Coin. The bank hopes to eventually make the token programmable, which means that rules about when its value can be transferred and redeemed can be written into it.

JPMorgan has also performed testing of what it calls “a blockchain-based prototype for capital markets, a system that would allow investors to trade tokens representing financial products such as commodities and bonds. D Other banks, including Citi, have added digital asset divisions, aimed at helping their customers buy and sell cryptocurrencies.

Omarova would also likely take a tougher line on regulating FinTech firms, which increasingly operate in many of the same businesses as traditional banks – such as lending – but with far fewer restrictions, including capital requirements. However, they remain outside the jurisdiction of the OCC because they are non-banking

In May 2020, Omarova told MSNBC that her research led her to identify a central problem in the structure of the financial sector: As part of normal business, banks and investors make all the important decisions. The public is only consulted in the event of a problem.

“We suddenly become the janitor,” Omarova said in the TV interview. “We are never allowed to sit at the table when decisions are made in advance.”

If nominated, Omarova’s skepticism of the industry could help her case by silencing critics who have sometimes warned that OCC executives are too friendly with the banks.

The office itself has identified “regulatory capture – when regulators act in the best interests of the industry they control – as an agency-wide risk. To reduce it, agency rotates its bank examiners every five years and needs a team of outsiders to In 2019, the Government Accountability Office urged the OCC to do more to protect against regulatory capture.

The agency also identified the “revolving door, between the financial sector and its regulators as an issue, as regulators may end up being sympathetic to the industry from which they come.

President Donald Trump appointed Joseph Otting, a former banking executive, to the OCC in 2017. As supervisor, he referred to banks as his “clients and sought to make it easier for them to comply with Community Reinvestment Act guidelines, a law obliging banks to lend to people of color and poor communities.

Following Otting’s departure in May 2020, Brian P. Brooks served as Acting Controller. Trump has twice submitted his candidacy for a full term, but the Senate has never moved to confirm it. Brooks has approved a new regulatory structure for fintech companies that has given them more power to grant loans without having to meet state limits on the amount of interest they can charge to borrowers they deem risky.

Brooks was a former legal director of Coinbase, a cryptocurrency exchange. After his stint at OCC, he became Managing Director of another cryptocurrency exchange, Binance.US. Although the OCC does not directly regulate cryptocurrencies, it has started to influence how banks can use digital payment systems.

The two appeared to have a warm relationship with at least one managing director of a bank: Jamie Dimon of JPMorgan. A series of emails obtained by The New York Times via a Freedom of Information Act request provide insight into the easy trips back and forth between Dimon and his bank’s main regulator.

In 2018, Otting thanked Dimon for being “among those who want our country to be the best it can be. The following year, when Otting informed Dimon that the OCC would reduce its regulatory fees for 2020, the head of JPMorgan responded. : “What a wonderful surprise and end-of-year treat! Thank you for caring about the financial health of the banking industry and your disciplined approach to spending. It’s great to see.,

Friendly exchanges continued with Brooks. On May 21, 2020, the day the OCC announced that Otting was stepping down and Brooks would take his place, Dimon and Brooks logged in for a phone call. After the call, Dimon wrote: “Brian, I enjoyed our phone call this morning and would like to reiterate that we are here to support your efforts in any way we can.,

Brooks replied, “Likewise, and added,” I will ask my assistant to contact you next week with times when we can call each other and I can go over a few points on the political agenda with you and get your. opinions on a handful of other things that I could use your perspective on. I very much appreciate your outreach – made my day!,

Otting, who received questions from The Times about his correspondence with Dimon through the general manager of the golf club he co-owns in Las Vegas, did not respond to a request for comment.

JPMorgan spokeswoman Patricia Wexler said in an email: “We always try to keep lines of communication open with regulators, as anyone might expect.,

Speaking on behalf of Brooks, Graham Karr, head of marketing at Binance.US, said: “Brian was a strong regulator who was tough on the banks – fining Citibank $ 400 million for mismanagement risk and internal control, fining JPMorgan $ 250 million for fiduciary breaches, fining Capital One and Morgan Stanley for cybersecurity risks, or penalizing certain Wells Fargo executives for their role in the scandal of the sales practices of consumers of this bank.

Currently, Michael Hsu, a former Federal Reserve attorney appointed by Treasury Secretary Janet Yellen, oversees the OCC. Hsu began to reshape the agency to align it with Biden’s agenda. He rolled back Otting’s overhaul of the Community Reinvestment Act, created a new oversight unit, and rolled back some structural changes from his predecessor that led to senior agency officials being less involved in the work of bank examiners. Last week, Hsu appointed an official to monitor the effects of bank lending decisions on climate change.

But Hsu has stayed away from issues that call for new policy proposals, including issues of managing fintech and cryptocurrency firms. These will likely be Omarova’s priorities if she becomes the next controller.

[ad_2]