Acting Comptroller Addresses Threats Posed to Consumer Trust in Banking
Commentary by Steven Lofchie
Acting Comptroller of the Currency Michael J. Hsu addressed the threats posed to consumer trust in banking from inequality, digitalization, complacency and climate-related risk.
In remarks at The Clearing House and Bank Policy Institute's Annual Conference, Mr. Hsu highlighted the importance of rebuilding trust in banking as a necessary step toward promoting community participation and investment. He cited an FDIC survey that found that approximately one-third of unbanked households cited a lack of trust as the primary reason why they do not have bank accounts.
Mr. Hsu said that "[p]ersistent economic inequality can erode trust in banking because those who feel stuck or lack access to traditional financial products and services may conclude that the system is working against them, rather than for them." He stated that the OCC is working to break down the structural barriers to financial inclusion, including improving customer financial health and strengthening supervision of fair lending laws.
Mr. Hsu reiterated the need to take a "careful and cautious" approach to digitalization and cryptocurrency, and warned that many banks do not currently possess the expertise or resources to adequately monitor the rapidly expanding digital banking industry. He noted that the increasing "de-integration" of banking services draws many parallels to the build-up to the 2008 financial crisis, and he said that the benefits of technology are lost to banks that don't have the proper risk management policies to control it. He said that the OCC is currently "working on a process to subdivide bank-fintech arrangements into cohorts with similar safety and soundness risk profiles and attributes. . . [to] . . . enable a clearer focus on risks and risk management expectations."
Mr. Hsu argued that banks have a multitude of resources available to them to ensure they are "adequately capitalized and well managed." He warned that these policies could potentially fail due to complacency, as demonstrated by the "'lackadaisical attitude towards risk discipline'" that lead to the Archegos collapse.
Mr. Hsu also described the urgent need to address the "physical and transition risks associated with climate change." He highlighted the OCC's December publication of Principles for Climate-Related Financial Risk Management for Large Banks. He said that the OCC is "sifting" through public comment on the Principles and emphasized the need for greater "coordination and harmonization" across jurisdictions, which he said was achievable in the near to medium term. He also highlighted "the need to operationalize scenario analyses and to prioritize diverse approaches . . . over one-size-fits-all stress tests," which would require data and metrics that are likely to present long-term challenges.
Commentary
According to Mr. Hsu, who cites a study of the FDIC, one-third of unbanked households say that they do not have bank accounts because they do not trust banks. Notwithstanding that all of those unbanked households would have their accounts fully protected by FDIC insurance, it is reasonable to ask questions about what the lack of trust means and from what does it arise. It seems unlikely though, that it arises from the factors on Mr. Hsu's list; that is, it would be surprising if the unbanked were saying, "I don't trust banks because I am worried about climate risk." And even if that were the case, perhaps it would mean that they were overly worried about climate risk, or worried about it for the wrong reasons. In any case, it would seem appropriate for the bank regulators to dig deeper into the reasons why individuals choose not to have bank accounts.