A staff member walks inside a priority banking service area of a Standard… (BOBBY YIP/REUTERS )
When a little-known New York regulator this month threatened to revoke the charter of a major international bank for allegedly laundering money for Iran, the shock waves were felt in Washington as much as on Wall Street.
Federal regulators were furious. Some felt New York had jumped the gun, jeopardizing a more methodical investigation being conducted inside the Beltway, officials familiar with the matter said.
It was not the first time state officials had leapt ahead of federal authorities. State attorneys general were the driving force in reining in improper mortgage practices by big banks, a task federal regulators had repeatedly failed to accomplish on their own.
In the wake of the financial crisis, some state regulators and officials have been flexing their muscle against big banks blamed for nearly bringing down the financial system. And they have been using state laws to get some of the world’s biggest financial institutions to fall in line. The cases can result in big paydays for states, such as the $340 million settlement New York reached with Standard Chartered, the London-based bank accused of flouting U.S. sanctions by concealing $250 billion in Iranian transactions.
Some state officials say federal regulators have been too industry-friendly or too mired in bureaucracy to quickly react to misconduct. Federal regulators argue that coordinated action is the most efficient way to handle enforcement and that sudden moves by lone actors could compromise the larger efforts.
Competition between government authorities is a natural consequence of a byzantine regulatory system that requires myriad agencies to oversee the same firms.
The New York Department of Financial Services is coming under fire for moving ahead of Washington with the case against Standard Chartered. Officials at the New York banking regulator said they told federal officials in April that they were moving ahead with the Standard Chartered case and received no push-back. Yet people familiar with the matter say federal agencies were not expecting Benjamin M. Lawsky, head of the state banking regulator, to act Aug. 13.
“They’re angry because Lawsky committed the cardinal sin in Washington — he embarrassed others by exposing their lack of action on evidence they’d been sitting on for two years,” said Neil Barofsky, a former special inspector general of the Treasury Department’s Troubled Assets Relief Program.
Standard Chartered said it alerted the Justice Department, the Federal Reserve Bank of New York and the New York Department of Financial Services in 2010 to Iranian transactions that were in violation of sanctions.
Lawsky’s office, created last year by merging the state banking and insurance departments, forged ahead with its investigation of Standard Chartered. Meanwhile, people familiar with the matter said, federal regulators were working together to build a case.
“Holding a bank accountable for past misconduct doesn’t need to take years of negotiation over the size of the penalty,” said Sen. Carl Levin (D-Mich.). “It simply requires a regulator with backbone to act.”
Bank’s license at risk
New York concluded its case Aug. 14 when Standard Chartered agreed to pay the regulator $340 million to settle allegations, under the threat of having its license to operate in the state revoked. Considering the significance of New York to the banking industry, that threat carries weight.
The case established Lawsky as an independent actor willing to confront big banks, while casting federal regulators in the familiar light of being slow to respond to abuses on Wall Street.
“It’s not surprising that New York acted” on its own, said Tariq Mirza, a former regulator at the Federal Deposit Insurance Corp. who is now a managing director at the consulting firm Grant Thornton. “New York has been fairly vigilant. It started with Eliot Spitzer, who was a very aggressive state attorney general that set the tone for successors like Andrew Cuomo.”
State attorneys general across the country have shown a penchant for going after troubling behavior by banks earlier than federal officials. They flagged abusive lending practices by banks, undertook investigations and sought to prosecute bad behavior, critics say, as federal regulators largely overlooked the problem and at times even impeded the efforts of state officials.
Richard Cordray, director of the Consumer Financial Protection Bureau, sued some of the nation’s largest banks during his tenure as Ohio’s attorney general, alleging that they had violated state consumer laws through a series of unfair and deceptive mortgage practices. Attorneys general in Iowa, Illinois and other states also were well ahead of federal regulators in trying to fight mortgage-related misdeeds.