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New Candidate for Top Bank Regulator Sees Risks in Crypto and Fintechs

6 min read

The Biden administration is vetting a new candidate for the job of top banking regulator after abandoning two earlier choices because a fight broke out within the Democratic Party. If the candidate — Saule Omarova, a professor of banking law at Cornell University Law School — is nominated to lead the Office of the Comptroller of the Currency and secures Senate support, Wall Street’s biggest banks can expect a less cozy relationship with her than they had with recent predecessors.

President Biden’s aides are vetting Ms. Omarova, and the process is 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 by early next year, the people said. She would then need Senate confirmation to serve a five-year term.

Spokeswomen for the White House and the O.C.C. declined to comment.

Ms. Omarova is seen as less controversial than the two previous candidates to lead the agency, which is little known outside the financial industry but has recently gained in importance — especially among Democrats who see banking regulation as a way to address widening racial and economic disparities, both priorities of Mr. Biden.

The first candidate, Michael S. Barr, an Obama administration official, drew criticism from progressives who said he was too deferential to banks when the Dodd-Frank regulatory package was being negotiated after the 2008 financial crisis. And Mehrsa Baradaran, a banking law professor who was a favorite of progressives, was attacked by Mr. Barr’s supporters for lacking management experience and the support of moderate Democrats. Both were dropped after administration officials concluded that neither was likely to garner enough support to be confirmed.

Ms. Omarova, a native of Kazakhstan, was a special adviser for regulatory policy at the Treasury Department under President George W. Bush and, before that, worked five years at the white-shoe law firm Davis Polk & Wardwell.

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

As comptroller, Ms. Omarova could seek to enhance the O.C.C.’s oversight of such businesses, which banks including JPMorgan Chase and Citigroup are building. Already, the Securities and Exchange Commission is seeking to step up its policing of cryptocurrency markets, its chairman, Gary Gensler, said during a recent speech.

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

JPMorgan has also conducted test runs 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. Other banks, including Citi, have added digital asset divisions, aiming to help their clients buy and sell cryptocurrencies.

Ms. Omarova would probably also take a harder line on regulating financial technology companies, which are increasingly operating in many of the same businesses as traditional banks — such as lending — but with far fewer restrictions, including capital requirements. Yet they remain out of the purview of the O.C.C. because they are “nonbanks.”

In May 2020, Ms. Omarova told MSNBC that her research had led her to identify a core problem with the structure of the financial industry: In the course of normal activity, banks and investors make all the important decisions. The public is consulted only when something goes wrong.

“We suddenly become the janitor,” Ms. Omarova said in the television interview. “We’re never allowed to sit at the table when decisions are made upfront.”

If she is nominated, Ms. Omarova’s skepticism of the industry could help her case by silencing critics who have at times warned that the O.C.C.’s leaders were too friendly with banks.

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The office itself has identified “regulatory capture” — when regulators act in the interest of the industry they are policing — as a risk across the agency. To reduce it, the agency rotates its bank examiners every five years and requires a team of outsiders to check their findings. In 2019, the Government Accountability Office urged the O.C.C. to do more to guard itself against regulatory capture.

The agency has also identified the “revolving door” between the financial industry and its regulators as a problem, because regulators can end up being sympathetic to the industry they come from.

President Donald J. Trump appointed Joseph Otting, a former banking executive, to the O.C.C. in 2017. As comptroller, he referred to banks as his “customers” and sought to make it easier for them to meet the directives of the Community Reinvestment Act, a law requiring banks to lend to people of color and to poor communities.

After Mr. Otting’s departure in May 2020, Brian P. Brooks served as acting comptroller. Twice, Mr. Trump submitted his nomination for a full term, but the Senate never moved to confirm him. Mr. Brooks signed off on a new regulatory structure for fintech companies that gave them more power to make loans without having to adhere to state limits on the amount of interest they can charge borrowers they deem risky.

Mr. Brooks was a former chief legal officer of Coinbase, a cryptocurrency exchange. After his O.C.C. stint, he became chief executive of another cryptocurrency exchange, Binance.US. While the O.C.C. does not directly regulate cryptocurrencies, it has begun to weigh in on how banks can use digital payments systems.

Both men appeared to cultivate warm relationships with at least one chief executive of a bank: Jamie Dimon of JPMorgan. A series of emails obtained by The New York Times via a Freedom of Information Act request provides a glimpse into the easy back-and-forth between Mr. Dimon and his bank’s main regulator.

In 2018, Mr. Otting thanked Mr. Dimon for being “among those that want our country to be the best it can be.” The next year, when Mr. Otting informed Mr. Dimon that the O.C.C. would be reducing its regulatory fees for 2020, the JPMorgan chief responded: “What a wonderful year end treat and surprise! Thank you for caring about the financial health of the banking sector and for the disciplined approach you are taking around expenses. It is excellent to see.”

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

Mr. Brooks responded, “Likewise,” and added: “I’ll have my assistant reach out next week with some times when we can get on the phone and I can run through a few policy agenda items with you and get your take on a handful of other things I could use your perspective on. Very much appreciate your outreach — made my day!”

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

A JPMorgan spokeswoman, Patricia Wexler, said in an email, “We always try to maintain open lines of communications with regulators, as anyone would expect.”

Speaking on behalf of Mr. Brooks, Graham Karr, the head of marketing at Binance.US, said: “Brian was a strong regulator who was tough on banks — fining Citibank $400 million for risk management and internal control failures, fining JPMorgan $250 million for fiduciary duty violations, fining both Capital One and Morgan Stanley for cybersecurity risks, or penalizing individual Wells Fargo executives for their role in that bank’s consumer sales practices scandal.”

Currently, Michael Hsu, a former Federal Reserve lawyer appointed by Treasury Secretary Janet L. Yellen, oversees the O.C.C. Mr. Hsu has begun reshaping the agency to align it with Mr. Biden’s agenda. He canceled Mr. Otting’s overhaul of the Community Reinvestment Act, created a new supervisory unit and reversed some structural changes by his predecessor that led senior agency officials to be less involved with bank examiners’ work. Last week, Mr. Hsu appointed an officer to monitor the effects of banks’ lending decisions on climate change.

But Mr. Hsu has stayed away from issues that require new policy proposals, including the questions of how to handle fintech firms and cryptocurrencies. Those are likely to be Ms. Omarova’s priorities if she becomes the next comptroller.

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