U.S. bank regulators would have more power to examine the largest and riskiest institutions, under a new interagency memorandum approved on Monday.
The agreement gives the Federal Deposit Insurance Corp a more prominent, on-site presence at the nation's largest banks, but seeks to ensure the agency does not add another burdensome set of eyes and ears at the firms.
The agreement seeks to remedy problems seen in 2008 when the FDIC was left scrambling for access to information about Washington Mutual, as the nation's then-largest thrift was failing. The Office of Thrift Supervision was Washington Mutual's primary regulator.
The FDIC needs to have a more active on-site presence, FDIC Chairman Sheila Bair said at a meeting of the agency.
The FDIC insures more than $7 trillion of deposits at the almost-8,000 U.S. banks and thrifts.
However, it is only the direct supervisor at about 4,900 mostly smaller banks, meaning the FDIC has to safeguard deposits at thousands of banks for which it is not primary supervisor.
The OTS, the Office of the Comptroller of the Currency and the Federal Reserve are the other federal bank supervisors.
The FDIC, under Bair, has taken a more assertive stance. Bair throughout the 2007-2009 financial crisis took a critical view of taxpayer assistance for large financial firms, occasionally clashing with other regulators and policymakers.
The memorandum approved on Monday would enhance the FDIC's role as back-up authority for any bank with federally insured deposits.
It would allow the chairman of the FDIC to order a special examination of troubled or large, risky banks, to ensure the agency can fully understand the threat to the FDIC's insurance fund and let it better prepare for any dismantling of an institution, if necessary.
It would also give the FDIC a higher profile and presence at a larger universe of banks, and would not allow other regulators to freeze out the FDIC during examinations.
Watchdog reports have detailed the thorny relationship between the FDIC and the OTS as the OTS tried to maintain a high regulatory rating of Washington Mutual, the largest firm it supervised.
When the FDIC finally decided to go ahead and downgrade Washington Mutual's rating just weeks before its failure, then-OTS director John Reich was furious, according to documents released by a congressional committee.
I cannot believe the continuing audacity of this woman, he wrote in an e-mail message to a senior OTS official, referring to FDIC's Bair.
The disjointed regulatory system was criticized during the financial crisis for preventing the quick sharing of information about troubled firms.
The financial reform bill that is expected to soon become law would rework the bank regulatory structure, including folding the OTS into the OCC.
The information-sharing memorandum approved on Monday seeks to tear down barriers between the regulators, before the law takes effect.
FDIC board members said the agreement was the result of a long period of negotiations, as regulators tried to strike the right balance between preserving their own powers, and ensuring transparency and cooperation.
Comptroller of the Currency John Dugan said he was leery of creating a de facto system of supervision by committee.
He said increasing the FDIC's access to these large and troubled banks should not undermine the powers of the primary regulator, and should not create duplicative supervision.
Dugan, who is leaving the post near the end of his five-year term on August 14, said he supports the negotiated memorandum, but wants to see how it works in practice.
This is of course only the beginning. What will matter most will be the implementation, he said.
(Reporting by Karey Wutkowski; Editing by Tim Dobbyn)