Dave Burbank Photography; Courtesy of Cornell Law School
Saule Omarova, President Biden’s nominee to head the Office of the Comptroller of the Currency
After several months, President Biden has finally chosen a nominee to head the Office of the Comptroller of the Currency (OCC), a key financial regulatory post. It’s Saule Omarova, a Cornell professor and critic of financial overreach who previously served at the Treasury Department under former President George W. Bush, and as an attorney at the corporate defense law firm Davis Polk & Wardwell.
Omarova immediately faced a flood of criticism from the banking industry, described as “radical” and “Biden’s most polarizing pick for a top financial regulatory job.” But the industry’s top objection to Omarova—what banks say they perceive as the real threat—may be a red herring.
Thus far, Omarova has been primarily condemned for musing in an academic paper last year about how individual bank accounts at the Federal Reserve could replace private deposits. The U.S. Chamber of Commerce on Tuesday announced their “strong opposition” to Omarova for precisely this reason. “Her pursuit of policy proposals expressed in her academic writings are outside the mainstream of either major political party and, if implemented, would lead to a near complete government takeover of banking,” wrote USCOC executive vice president and chief policy officer Neil Bradley in a letter to senators.
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Such a change, which Omarova entertains in the paper as “an exploratory exercise,” would not be under her jurisdiction at the OCC, and would require legislation to accomplish. But it sounds scary enough—eliminate all private banking!—for the industry to paint Omarova as hell-bent on their destruction.
What bankers and their allies really cannot abide is a sharp critic, who uses the knowledge gained from inside the industry against them. Indeed, Omarova would have significant tools available at the OCC to tamp down financial risk and guard against crisis. But it’s harder for finance mouthpieces to argue that such risk should be sustained for the sake of their profits.
THE CHOICE OF OMAROVA breaks sharply with precedent for the traditionally bank-friendly office. Established by Abraham Lincoln as a branch of the Treasury in 1863, the OCC is the main regulator for federally chartered banks, overseeing roughly two-thirds of total assets in the U.S. banking system. The agency is self-financed through the inspection fees it charges the banks it oversees, a funding mechanism critics of deregulation have identified as a conflict of interest.
The history of the OCC over the past half-century gives those critics abundant evidence that the agency operates as a bank advocate masquerading as a prudent regulator.
For example, John F. Kennedy’s comptroller, James Saxon, was the first federal official in 30 years to attack the separation between investment and commercial banking, issuing rules allowing national banks to offer “commingled accounts” that amounted to mutual funds to retail customers, and to underwrite municipal bonds. While the Supreme Court eventually threw out those challenges to the Glass-Steagall Act in 1970, the OCC’s rulemaking opened the door to banks engaging in a mushrooming variety of securities activities.
In 2002, when Georgia passed an anti–predatory lending law in response to troubling accounts of mortgage fraud during the housing bubble, the OCC told the national banks it regulated that they didn’t have to comply with the law. The state eventually revoked the Georgia Fair Lending Act, and other states never risked OCC preemption, leading to the uncontrolled fraud that culminated in the financial crisis.
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Omarova would represent a sharp break with this history. “What’s motivating the histrionics,” Georgetown Law professor Adam Levitin wrote, is that “she does not see banks as the clients of the OCC.”
Her early scholarship involved corporate governance, and the obscure ways regulators have enabled banks to take on risk and subvert the intent of existing laws. More recently, Omarova has championed a National Investment Authority, a federal entity that would create a public option for investment, steering American industrial policy with banking and direct equity investment arms. (The Prospect explored new proposals for public investment in a roundtable last year.)
In a similar vein, Omarova wrote “The People’s Ledger: How to Democratize Money and Finance the Economy” last year. In the scholarship now seized on by the banking industry, Omarova has considered a scenario in which “central bank accounts fully replace—rather than compete with—private bank deposits.”
The proposal builds off an idea of a public option for bank accounts called FedAccount, developed and championed by former Obama Treasury Department officials. While the FedAccount was envisioned by its progenitors as an option individuals could take, in her thought experiment, Omarova takes it a step further and says it could be made mandatory. If the initial FedAccount was a public option, Omarova’s thought experiment was more akin to single-payer.
The choice of Omarova breaks sharply with precedent for the traditionally bank-friendly office.
The name of the proposal—FedAccount—should make it obvious that the Federal Reserve, not the OCC, would be the main driver of this policy. “[Omarova] can’t do this unilaterally,” said Morgan Ricks, one of the authors of the FedAccount proposal, now at Vanderbilt University. “We even say in the paper that it would require legislation. Even statutorily, it’s the Fed’s decision.”
The current chair of the Fed, Jerome Powell, was asked last year by Rep. Stephen Lynch (D-MA) about the proposal and whether it would help the millions of Americans with little or no access to financial services.
A public option for checking accounts could set off “a very dramatic change in the landscape of banking,” Powell mused. “What would happen to the rest of our private banking system, because an awful lot of people would opt to keep their personal money at the Fed. And then who would do the lending?”
Powell’s warning amused Ricks. “It’s this funny thing, we can’t give everyone something that’s too good, that they might want.” With Powell or any likely successor as chair, the dissolution of private banking is unlikely, especially as it would require an act of Congress.
The issue, however, is a convenient cudgel for the banking industry to try and stop Omarova from actually regulating them, from the perch of an agency where regulation has been traditionally weak at best.
THE RESEARCH PAPER THAT BANKS are more likely worried about is a 2009 article titled “The Quiet Metamorphosis: How Derivatives Changed the ‘Business of Banking.’” It examines a series of interpretive letters that the OCC issued allowing banks to engage in the lucrative but high-risk practice of derivatives trading, another primary driver of the financial crisis.
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Federally chartered banks are restricted to conducting the activities of the “business of banking,” as spelled out in the National Bank Act of 1863. Glass-Steagall amended this in 1933 by preventing deposit-taking banks from investment activities.
But starting in the mid-1980s, OCC interpretive letters began to gradually broaden the scope of business of banking activities, in response to requests from large banks. This extended banks’ derivatives activities from incidental hedging to trading in interest-rate, currency, commodities, and asset-backed swaps. Even though derivatives trading inside FDIC-insured banks remains barred by Glass-Steagall, the interpretive letters allowed it to occur.
From there, it didn’t take long for the largest banks, all of which are regulated by the OCC, to dominate derivatives markets. JPMorgan Chase, Goldman Sachs, and Citibank all have more than $40 trillion each in notional derivatives on their books.
Congress tried to end this practice of having risky derivatives trading desks inside depository institutions in the Dodd-Frank financial reform. Section 716, the “swaps pushout” provision, would have separated those functions from the bank and put derivatives into an affiliated broker-dealer. But in 2014, lobbyists with Citi literally wrote the bill repealing the swaps pushout measure, and it was successfully inserted into a year-end spending measure.
Legal experts say there is strong precedent for the OCC having the authority to enforce the “business of banking” rules.
With Omarova at the helm, the OCC could simply change their interpretation of the National Bank Act and restore the older restrictions.
“If Saule were the comptroller, she would have the ability to, consistent with administrative law, repeal those letters,” Ricks said. “She could do the swaps pushout by herself.” While this would likely be subject to litigation, legal experts say there is strong precedent for the OCC having the authority to enforce the “business of banking” rules, sharply curbing banks’ permission to speculate in unregulated and opaque financial playgrounds.
That would certainly give reason for banks to squeal at the Omarova selection: Her scholarship has identified a way that obscure regulatory decisions enabled financial innovation that has privatized profits while pooling risk. And she could reverse that process with the stroke of a pen.
But complaining that a new regulator would stop them from making dangerous trades inside institutions insured by the government would not endear the banking industry to the public. Saying that she would end banking as we know it—despite not having that authority—is a much more effective tactic.
In “The Merchants of Wall Street,” Omarova similarly identified how big banks quietly moved into the business of physical commodities like aluminum, oil, and energy, transforming a financial sector that is supposed to be separate from commerce under the banking laws. In general, she has criticized bank agglomeration of more business lines and power, and at the OCC, she could play a powerful role in reining in this activity.
Omarova would also be a key figure in the OCC’s planned overhaul to the Community Reinvestment Act, banks’ basically unenforced, decades-old requirement to lend to low-income areas. The National Community Reinvestment Coalition, which aims to end lending discrimination, welcomed the pick.
Bank regulators are also increasingly wary of unregulated cryptocurrency schemes like stablecoins, whose value is often pegged to the U.S. dollar. Many worry the money-like instruments could destabilize markets and facilitate financial crimes like tax evasion. Omarova, who has been skeptical of crypto, would take charge of an agency that has been giving special-purpose bank charters to crypto companies, and be involved in government-wide efforts to regulate stablecoins and other digital-currency innovations.
It’s unclear whether industry screeching about an anti-bank nominee will move their allies in the Senate to vote down the Omarova selection. Sen. Mark Warner (D-VA) told Politico he wanted “to do a little bit of due diligence” before commenting. Warner, along with other finance-friendly Banking Committee members like Sens. Kyrsten Sinema (D-AZ) and Jon Tester (D-MT), will get to question Omarova specifically in a confirmation hearing.
