Rick Riccobono, the top banking regulator at the state Department of Financial Institutions, vows to advocate for changing accounting rules he says needlessly weaken local banks.
One Thursday night two years ago, Rick Riccobono got an urgent call after dinner from a federal official who said a Washington bank might need more funds the next day to survive a bank run.
Still fresh in regulators’ minds was IndyMac Bank’s failure in California, preceded by lines of customers trying to withdraw their deposits.
Riccobono, then the chief executive of the Federal Home Loan Bank of Seattle, directed his staff members to make a loan to the failing Washington bank, knowing his institution would get the money back. Late the next day, regulators closed the bank in an orderly way.
“It’s all about maintaining confidence in the banking system,” said Riccobono, who in July became the top banking regulator at the state Department of Financial Institutions.
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In his first month on the job, he had to close the Bank of Whitman in Colfax, which became the 17th Washington bank closed since 2009. A career government executive, Riccobono is regarded by some bankers as an ideal choice for the job because of his knowledge, experience working with distressed banks, and relationships with bankers and regulators across the country.
Riccobono’s former colleagues view him as a firm but reasonable regulator.
“He’s not there to be a bank cop,” said Mike Daly, former chairman of the Federal Home Loan Bank in Seattle. “He has the attitude of the regulator that it’s not your business to help somebody fail. It’s your business to help them survive and be successful.”
Riccobono’s earlier career traces a path through two federal regulatory agencies that were widely criticized after banking crises and were eventually abolished by Congress.
Both the Office of Thrift Supervision (OTS) and the earlier Federal Home Loan Bank Board were blamed for not effectively policing risky lending and rosy accounting practices that blew up later in the failures of hundreds of thrifts, including Washington Mutual, the largest bank failure ever.
OTS “has an absolutely deplorable history of overseeing the industry,” said Kathleen Day, a spokeswoman for the nonprofit Center for Responsible Lending in Durham, N.C. “They were competing with other regulators to see who could be most lenient in a race to the bottom.”
Riccobono rejects that criticism, pointing to OTS’ success on his watch by reining in subprime auto lending, banning second mortgages structured so the debt could grow and yanking the thrift charter of Household Finance Corp., which attorneys general nationwide accused of predatory lending.
“I’m proud of what we did,” said Riccobono, who left the Office of Thrift Supervision in August 2005 to move to Seattle. “There wasn’t lapsed supervision when I was there.”
Today, Riccobono is responsible for supervising about 60 state-chartered banks, most of them small community lenders.
His priority, Riccobono says, is ensuring his staff members and other regulators use “reasonableness and common sense” in supervising banks.
He plans to support the industry by challenging a national accounting rule that banks dislike because it requires them to write-down the value of restructured loans. He says that requirement needlessly erodes their financial strength and reduces their ability to make loans.
Right now, he said, “Bankers are holding on desperately to every dollar of capital that they can because they’re in this very harsh regulatory environment.”
Riccobono’s views on regulation were shaped by his rare front-seat view of the savings-and-loan crisis of the 1980s and early 1990s, which ultimately saw the failure of 1,043 thrifts.
“I watched unintended consequences cause a massive debacle for the savings-and-loan industry,” he said.
A native of Nassau County, N.Y., Riccobono grew up working for his father, who was a mechanical contractor and had his own business. His father told him to get a law degree.
Riccobono became an attorney and a CPA. In 1982, he joined the tax practice of Deloitte & Touche in Houston.
That same year, Congress deregulated the thrift industry, allowing the formerly slow-moving S&Ls to offer market-interest rates so they could compete with other financial institutions.
One consequence: The industry, traditionally concentrated in long-term fixed-rate home mortgages, found itself paying more interest on its deposits than it was receiving on its loans.
So Congress allowed thrifts to invest federally insured deposits in virtually anything, even art, yachts and junk bonds.
And owners of thrifts weren’t required to have much skin in the game — as little as 3 percent of assets. “We were allowing every Tom, Dick and Harry that waved capital at them to buy a sick thrift,” Riccobono said.
The result was that from 1989 to 1992, regulators closed 248 thrifts, an average of one a week.
One lesson Riccobono took away from the S&L disaster is that “Congress needs to be really careful when they pass any kind of legislation that affects our banking system.”
Coming out of the crisis, regulators had the philosophy that closing a weak bank fast was better than trying to nurture it back to health.
Today, “I’m not sure that’s the least-cost solution,” Riccobono says.
Riccobono moved to OTS and led its regional office in Atlanta until 1998, when he became deputy director at the agency headquarters in Washington, D.C.
While Riccobono has been involved with closing dozens of thrifts, he says the only one in which he made the final decision was Superior Bank in Illinois, a $2 billion bank concentrated in subprime mortgage lending. The bank failure cost the deposit insurance fund about $700 million, one of the biggest financial institutions to fail in the past decade.
The Government Accountability Office, the chief watchdog for Congress, criticized the big accounting firm Ernst & Young for supporting an inflated valuation of the bank’s assets, but it also blasted the bank’s regulator for relying too much on Superior’s management to do the right thing.
Riccobono concedes that OTS put too much authority in its regional office for such a large institution. But the government later got a $460 million settlement with Superior’s owners and a $125 million settlement with Ernst & Young, the bank’s outside auditor.
He learned what it’s like to be across the table from federal regulators when he left the OTS in late 2005 to become chief operating officer, and eventually chief executive, at the Federal Home Loan Bank of Seattle. The congressionally chartered lending cooperative for banks and credit unions enables them to make more mortgage loans.
In early 2009, the home-loan bank’s federal regulator deemed the institution “undercapitalized.” In October 2010, the Federal Home Loan Bank announced Riccobono’s resignation as president and CEO of the home-loan bank — the same day the institution agreed to a consent order by its federal regulator to shore up its capital levels.
Riccobono said that under accounting rules, the bank had to take $475 million in write-offs in one quarter on its $3.5 billion portfolio of private mortgage-backed securities — even though the bank has lost only about $1.5 million of that portfolio to loan defaults.
Getting the national banking regulators to rethink that accounting approach is high on his list of goals.
“(It) is destroying America’s capital, and it’s destroyed a lot of our banks.”
Sanjay Bhatt: 206-464-3103 or email@example.com