Evolution of Bank Supervision: 1980–1989

During the 1980s, the OCC placed more emphasis on off-site monitoring through advances in computer technology, introducing a portable computer called the Supervision Monitoring System to store and share data, and less emphasis on on-site examinations. Although these internal changes implied fewer examiners would be needed, both the Carter and Reagan administrations restricted hiring to reduce the size of the federal government, freezing examiner staffing levels in 1981 and forcing the issue.

While policy and staffing shifts occurred, the number of bank mergers and acquisitions and new bank charters increased dramatically. Legislative changes allowed interest-bearing checking accounts and deregulated interest ceilings on deposit accounts. All of this further enabled bank competition.

The Economic Recovery Tax Act of 1981 gave real estate investors extraordinary, though temporary, incentives to invest by accelerating depreciation, and the Garn–St. Germain Depository Institutions Act of 1982 allowed thrifts to make commercial real estate, construction, and commercial loans. These new laws helped fuel an explosion of speculative real estate lending that lasted until 1986, when the Tax Reform Act took away investor-friendly incentives.

Commercial real estate investment then ground to a halt—resulting in the savings and loan crisis. By 1988, about 250 thrifts with $81 billion in assets were technically insolvent.

In addition, developing countries defaulted on obligations, and a decline in the energy sector caused turbulence in bank portfolios. Banks and thrifts failed in numbers not seen since the Great Depression.

Through attrition, the OCC examiner staff had declined by 20 percent at the same time that the number of troubled banks increased. With too few examiners, more off-site examination activity, and insufficient tools to get in front of the speculative commercial real estate lending, the high number of bank failures in the late 1980s raised questions about the effectiveness of supervision systems to identify problem banks and examiners’ ability to then influence bank behavior.

Looking back on the animosity from some bankers during this time:

“You'd be in a loan discussion at a little bank … and they'd pull a pistol out of a desk and start cleaning it or lay it on the table.”

Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), which addressed many of these issues. It also created the Office of Thrift Supervision (OTS) from the Federal Home Loan Bank Board and the Resolution Trust Corporation.

By the end of the decade, it was clear that off-site monitoring was not a substitute for, but potentially a useful complement to, on-site examinations. Additionally, the OCC’s supervision system evolved into the Uniform Bank Surveillance System, whose best-known product is the Uniform Bank Performance Report. The agency also concentrated examination resources on banks that posed the greatest threat to stability across the system, physically embedding examiners within the largest 11 banks.

Looking back on the banking crises of the late 1980s to early 1990s:

During that whole time … we had a terrible reputation. We were called the regulators from hell. There were many that pointed fingers to us, particularly the OCC, that we were causing some of the problems.

Around this time, the OCC introduced quarterly bank reviews that monitored changes in a bank’s call report. These reviews added regular, recurring touch points between examiners and bankers that dramatically changed the tone of how banks and examiners interacted. Bank examiners were not necessarily viewed as an untrustworthy adversary any longer; rather, examiners became seen as an asset to ensuring a bank’s safety and soundness.

As the agency rebuilt its examiner workforce, in numbers and experience, FIRREA helped the OCC recruit new employees by removing the civil service limits on OCC pay and benefits. The agency now could offer salaries comparable to other financial regulators as well as the banking industry.

Then, newly recruited assistant national bank examiners, upon taking the Uniform Commission Examination, had to find and apply for a new job and move before becoming commissioned.