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MARCH TO AUGUST : SYSTEMIC RISK CONCERNS
The Treasury’s inspector general would later criticize OTS’s supervision of Wash-
ington Mutual: “We concluded that OTS should have lowered WaMu’s composite rat-
ing sooner and taken stronger enforcement action sooner to force WaMu’s
management to correct the problems identified by OTS. Specifically, given WaMu
management’s persistent lack of progress in correcting OTS-identified weaknesses,
we believe OTS should have followed its own policies and taken formal enforcement
action rather than informal enforcement action.”
Regulators: “A lot of that pushback”
In these examples and others that the Commission studied, regulators either failed or
were late to identify the mistakes and problems of commercial banks and thrifts or did
not react strongly enough when they were identified. In part, this failure reflects the
nature of bank examinations conducted during periods of apparent financial calm
when institutions were reporting profits. In addition to their role as enforcers of regu-
lation, regulators acted something like consultants, working with banks to assess the
adequacy of their systems. This function was, to a degree, a reflection of the supervi-
sors’ “risk-focused” approach. The OCC Large Bank Supervision Handbook published
in January explains, “Under this approach, examiners do not attempt to restrict
risk-taking but rather determine whether banks identify, understand, and control the
risks they assume.” As the crisis developed, bank regulators were slow to shift gears.
Senior supervisors told the FCIC it was difficult to express their concerns force-
fully when financial institutions were generating record-level profits. The Fed’s Roger
Cole told the FCIC that supervisors did discuss issues such as whether banks were
growing too fast and taking too much risk, but ran into pushback. “Frankly a lot of
that pushback was given credence on the part of the firms by the fact that—like a
Citigroup was earning to billion a quarter. And that is really hard for a supervi-
sor to successfully challenge. When that kind of money is flowing out quarter after
quarter after quarter, and their capital ratios are way above the minimums, it’s very
hard to challenge.”
Supervisors also told the FCIC that they feared aggravating a bank’s already-exist-
ing problems. For the large banks, the issuance of a formal, public supervisory action
taken under the federal banking statutes marked a severe regulatory assessment of
the bank’s risk practices, and it was rarely employed for banks that were determined
to be going concerns. Richard Spillenkothen, the Fed’s head of supervision until early
, attributed supervisory reluctance to “a belief that the traditional, nonpublic
(behind-the-scenes) approach to supervision was less confrontational and more
likely to induce bank management to cooperate; a desire not to inject an element of
contentiousness into what was felt to be a constructive or equable relationship with
management; and a fear that financial markets would overreact to public actions,
possibly causing a run.” Spillenkothen argued that these concerns were relevant but
that “at times they can impede effective supervision and delay the implementation of
needed corrective action. One of the lessons of this crisis . . . is that the working pre-
sumption should be earlier and stronger supervisory follow up.” 
