OCC Sees Benefits of Connecting Regulation and Risk ManagementComptroller of the Currency John Dugan told an audience of bank risk managers earlier this week because their goals are so closely aligned to those of the regulators, the regulations and guidance issued by the agencies can support them in meeting their institutionsâ€™ objectives.
Dugan said regulators can highlight concerns that are important to risk managers, but which others in the bank might prefer to ignore for competitive reasons. An example is the interagency guidance on non-traditional mortgages, which establishes expectations for prudent underwriting, taking into account some of the unique features and risks these products present. A joint release seeking comment from federal agencies was issued on a proposed Statement on Subprime Mortgage Lending on Friday.
"A single bank applying these underwriting standards on its own would be less risky, but could well be priced out of the market," Mr. Dugan said. "By applying this guidance widely and consistently, to both bank and nonbank lenders, risk is reduced across the financial system, at all affected firms."
Dugan added these kinds of benefits can be maximized if regulatory standards are thoughtfully designed to align with sound risk management practices. "That means that we regulators have an obligation to approach the development of any new rules with a solid grasp of what you and your colleagues do," he said.
Dugan said rules that build from what bank risk managers already do allow the regulatory agencies to accomplish policy objectives without adding significantly to compliance burden. In addition, he said, those kinds of rules can be principles-based, rather than turning into a detailed set of prescriptive requirements that are followed only as a compliance exercise.
"Rules that reflect sound industry practice are much less likely to lead to attempts to evade misguided regulatory standards," Dugan added. "I would much rather have the intellect and creativity of this audience focused on providing financial services and running good institutions than on evading poorly designed rules."
In the Basel II capital framework, Dugan said, regulators were able to provide a sound conceptual framework for large bank capital standards in large part because they engaged in an extensive exploration of emerging industry practices in risk measurement.
Dugan said he supports the Basel standard, and said one of the most important things about it is that it will encourage good risk management. Compared to current standards, he said, Basel II will be more risk-sensitive; better suited to the structure, activities, and operation of modern, large financial firms; and better able to adapt to changes in the nature of banking activity. And it will provide better information to regulators and the markets through regulatory reporting and disclosure.