McGill University scholar John A. Hall describes civility as the “glue that holds society together.” Civility, or the lack thereof, comes up in politics, the workplace, and our personal lives. The role of civility in bank supervision presents an interesting case in point. The relationship between banks and their supervisors is inherently adversarial, but also works best in an atmosphere of cooperation and respect. My 30-plus years in bank supervision have helped me form some clear ideas about what civility means in practice.
Lady Byng
I’m not much of an ice hockey fan, but the National Hockey League gives out one of my favorite awards. The Lady Byng Memorial Trophy goes to the player who best exemplifies “sportsmanship and gentlemanly conduct.” Marie Evelyn Byng was the wife of the Governor General of Canada and apparently a big hockey fan. A sport known for its fighting and rough play also recognizes gentlemanly conduct. The Lady Byng Trophy also presents a charmingly quaint counternarrative in a world where Nike runs the “Am I a Bad Person?” commercial that celebrates being a jerk.
I spent over thirty years in banking supervision and came across all kinds of people. Since our job revolved around critiquing banks and their management, you can’t expect to always see people at their best. But some exemplify the spirit of Lady Byng. One guy in particular stands out. He worked at a bank where we had an often-contentious relationship. The person was cordial but not especially gregarious. His responsiveness stood out. If you had a question, he would get back to you right away, usually by the close of business. He’d apologize if his response took until the next morning. This was at a bank where eliciting a timely response was like pulling teeth. It helped that he was experienced and knowledgeable. A total pro.
I remember another guy, at the same bank. He wasn’t openly hostile or rude but tended to be evasive and dismissive. This person showed little interest in addressing our concerns or taking responsibility. He liked to filibuster his way through meetings. What’s curious is that the bank often used him as its point man when dealing with regulators. It reminded me of how the famously uncharismatic Richard Nixon would sometimes talk about turning on “the old Nixon charm.”[1] The bank’s efforts to charm the regulators were about as effective.
Civility doesn’t buy you a get out of jail free card. We look at the bank’s condition and risk practices. We look for management to be prudent and effective and not necessarily Mr. or Ms. Congeniality. However, the way management interacts with regulators still plays a role. Cooperation is a good way to build credibility. Evasive or even hostile responses to legitimate requests can be a sign of a bad actor. We also assess management on its responsiveness to supervision. It’s one thing to write “we take your concerns seriously” and quite another to show you mean it.
Smiling Tigers
We’d also encounter another personality type: the smiling tiger. One CEO, whom I’ll call “Jack”, comes to mind. Jack made a considerable effort to cultivate the regulators and it worked quite well for a while. Some regulators even extolled the bank and its management though its performance metrics were nothing special. However, Jack had a thin skin and reacted angrily to criticism. We would speculate whether we’d get the “Good Jack” or the “Bad Jack” on any particular day. Even the “Bad Jack” wasn’t that bad, but the contrast was hard to ignore.
There is nothing inherently wrong with pushing back against an examiner’s findings. Good examiners should be prepared to defend their findings, and that challenge process can lead to more thoughtful supervisory actions. But there are also cases where bankers devote too much of their brains and resources disputing a finding or finding a loophole rather than addressing the concern.
Handling Challenging Personalities
I developed a reputation over the years of being adept at handling challenging personalities. There is no magic formula, but here are a few principles for regulators to bear in mind.
Stick to the facts. Focus on the bank’s financial condition and risk as well as specific management actions that contribute to that risk profile. Responsiveness to supervision is fair game but be prepared to provide specific examples. Don’t make it about personalities.
Don’t be intimidated. Civil doesn’t mean weak. Larger banks can bring considerable resources to a dispute, not to mention armies of consultants, attorneys, and accountants at their disposal. It’s easy for examiners, especially those with less experience, to feel intimidated. Some smaller banks will make up in aggression what they lack in resources and expertise. Banks of all sizes may adopt an especially aggressive posture because it works – at least some of the time. But consider that aggression can be more a sign of weakness than strength. You need not fear a chihuahua just because it barks a lot.
Keep some distance. Regulators and the regulated should try to maintain a civil, even cordial relationship. You’re also going to like some people more than others. But try to avoid getting too buddy-buddy. That undermines your objectivity and credibility.
Don’t hold a grudge. Early in my career, we analyzed a securitization involving one of the banks we regulate. We met with representatives of the company arranging the securitization. For reasons that remain a mystery, they were unusually hostile and condescending. I ran into them again several years later. This time they were pleasant and cooperative. Neither of us brought up the prior meeting. I don’t know the motivation for their earlier hostility. Perhaps they weren’t used to dealing with regulators. Or maybe they had a bad day, or they overplayed the good cop/bad cop routine. It didn’t matter. They were cooperative now and that’s enough.
When Regulators Misbehave
Civility is a two-way street. A 2016 report by the FDIC’s Office of Inspector General (OIG) details a case where concerns over refund anticipation loans (RALs) “degenerated into meetings and telephone calls where banks were abusively threatened by an FDIC attorney.” The case the OIG describes was unusual, but regulators can interact with bank officials in a less than professional manner. This happens most often when subject matter experts (SMEs) come in to help but can’t seem to get off their high horses. I spent much of my career as an SME, so I tried to be sensitive to this perception.
Regulators can keep the spirit of Lady Byng alive in more mundane ways. One is to be sensitive to others’ time. When requesting information from the bank, examiners should focus on what they need to make their assessment rather than submitting a long laundry list. Regulators should also respond quickly to inquiries from the bank. This is especially the case when dealing with smaller community banks, where compliance presents more of a challenge. Regulators should avoid surprises. They should bring up potential concerns early in the process. This can be a little tricky, especially since some supervisory decisions need to go through extensive vetting and it may be unwise to show your hand too early. Problems can also come to light during the final days of an exam. In most cases, however, issues should not arise out of the blue.
Maintaining civility in bank supervision can present some special challenges. The two sides won’t always agree, nor should they. It all boils down to professionalism. Treat the other side with respect. Taking this approach helps you do your job better. More importantly, it’s the right thing to do.
[1] References to “the old Nixon charm” predate the Oliver Stone film by decades.