OCC Comptroller Reports on the State of the Federal Bank System
Commentary by Steven Lofchie
In testimony before the House Financial Services Committee, Acting Comptroller of the Currency Michael J. Hsu reported that the "overall condition of the federal banking system remains sound."
Mr. Hsu discussed progress on four priorities he announced in 2021 to foster trust in banking: (i) risk management; (ii) elevating fairness; (iii) adapting to digitalization; and (iv) managing climate-related financial risks. On risk management, he asserted that strengthening risk assessment and encouraging bankers to be vigilant during the Covid pandemic ensured that customers and counterparties to national banks had "peace of mind." He noted that during the same period, "crypto lost over $2 trillion of value and [many platforms] failed; inflation and interest rates rose rapidly, stressing parts of the banking system; and commercial real estate concerns grabbed market headlines."
On "elevating fairness," Mr. Hsu said the OCC focused on strengthening the Community Reinvestment Act, reforming overdraft practices, updating fair lending screens and examinations and expanding financial inclusion through Project REACh ("Roundtable for Economic Access and Change"), which promotes greater access to credit and capital.
On digitalization, Mr. Hsu described the increasing role of Fintechs and big tech to offer payments, lending and deposit-taking services to their users. He highlighted OCC efforts on: (i) interagency guidance concerning third party risk management, including banks' arrangements with Fintechs (see related coverage); (ii) enforcement actions against sponsor banks with weak practices; (iii) a request for information which provided a framework that distinguished between deposit-taking, lending and payments arrangements (see related coverage); and (iv) "facilitating responsible cloud adoption by banks of all sizes."
On climate-related financial risks, Mr. Hsu reported that banks "have been making progress on incorporating climate-related financial risks into their risk management frameworks and policies." He added that increases in the frequency and severity of extreme weather events will require changes "that banks will have to adapt to," including as to how insurance affordability and availability will affect customers and asset valuations.
Commentary
In his testimony on the strength of the federal banking system, Mr. Hsu neglected to mention that there were horrific failures by state-regulated banks during his tenure. It would be interesting to hear his views on why the regulation of those banks failed and his opinion as to what might be learned from those failures.