OCC Comptroller Hsu Addresses Financial Stability and Large Bank Resolvability Gap

At The Wharton Conference on Financial Regulation, Acting Comptroller of the Currency, Michael J. Hsu, presented his view on large bank resolvability.

Mr. Hsu stated that while extraordinary government support to large banks during financial crises may seem necessary in the short-term to avoid financial disruption, more regulatory focus should be placed on how a failed bank may be resolved. He argued that those evaluating the financial stability profiles of large banks should not only take into consideration "the disruptive effects on financial markets and counterparties should [those] bank[s] fail," but also the resolvability of such banks and the implications of such resolvability. In particular, Mr. Hsu highlighted a gap in resolvability between U.S. global systemically important banks (“GSIBs”) and large non-GSIB regional banks. While U.S. GSIBs are subject to heightened resolvability expectations under Title I of the Dodd-Frank Act, questions remains about how to resolve the largest non-GSIB banks. Mr. Hsu stated that there is now only one option for the failure of a large non-GSIB bank: for it to be purchased and assumed by a GSIB. This would, in Mr. Hsu's view, force a GSIB to "be made significantly more systemic, with minimal due diligence and limited identification of integration challenges, which for firms of this size are significant." Furthermore, Mr. Hsu argues that such increased concentration of banking would decrease "trust in the resolution process and in the government's ability to proactively manage such situations."

In order to broaden the resolvability of large non-GSIB regional banks, there are three paths that Mr. Hsu said should be considered:

  • a single-point-of-entry (“SPOE”) resolution strategy: requiring a bank to be structured so that, in the event of bankruptcy, only the parent company files for bankruptcy while its material subsidiaries continue to operate, thus avoiding multiple cross default proceedings;
  • a total loss absorbing capital (“TLAC”) “bail out” strategy: requiring the parent company to hold enough long-term debt to allow private investors to absorb the bank’s losses and be “bailed in” instead of taxpayers footing the bill for a bailout; and
  • separable lines of business and/or portfolios: requiring a bank to structure its lines of its business in a way that, in the event of stress or receivership, separate businesses can be sold quickly and without impediments for value.

Mr. Hsu concluded his remarks by stating that these three elements will take time to implement under OCC rulemaking proceedings. However, in the interim, banking regulators should require commitments to implementing SPOE, TLAC, and separability as a condition of approval for new mergers in order to mitigate risk of failure to non-GSIBs. Mr. Hsu stated that such an approach is currently being reviewed and considered by the OCC, and that the OCC would welcome "thoughts and ideas from the academic community and other stakeholders on this and the broader issue of financial stability and large bank resolvability."

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