Acting Comptroller Calls for Regulation to Address "Too-Big-to-Manage" Banks

Acting Comptroller Michael J. Hsu urged the development of a regulatory framework intended to discourage large banks from becoming "too-big-to-manage" ("TBTM").

In remarks at the Brookings Institution, Mr. Hsu said that as a bank increases in size and complexity, it suffers a diminution in its ability to manage risk. He said that the best way for a bank to address the TBTM problem is to simplify its operations.

Mr. Hsu identified five indicators of a bank that is becoming too big to manage:

• determining the severity of an issue based on the percentage of total customers affected instead of the absolute number of affected customers;

• assuming an issue is an isolated event and failing to take steps to investigate similar issues throughout the bank;

• relying on bank supervisors to uncover risks and issues that the bank's internal risk management controls fail to identify;

• failing to dedicate resources to address a problem whether because (i) the materiality threshold was too high, (ii) the bank missed the issue, or (iii) senior level management declined to follow-up; and

• rushing the integration of risk management programs after a merger instead of taking time to combine the two banks' operations (Mr. Hsu also called for the modernization of bank merger guidelines see here).

Mr. Hsu asserted that the best way to differentiate between a bank becoming too big to manage and one being poorly managed is to implement a framework that requires a bank to prove it can manage its own operations. He said that the OCC's four-level escalation framework provides banks the independence to remediate flagged issues on their own and gradually imposes heavier penalties against those that don't. Mr. Hsu noted that the imposition of monetary penalties is generally a sufficient motive for a bank to remediate an issue, but that in the most extreme circumstance the OCC may recommend that the bank divest certain businesses.