Acting Comptroller Hsu Advocates for Targeted Changes to Liquidity Risk Management Regulation

Acting Comptroller of the Currency Michael J. Hsu argued that careful consideration should be given to any regulatory enhancements to help ensure that "updated liquidity risk management practices are implemented and sustained systematically and consistently, especially across midsize and large banks."

In a speech before Columbia Law School, Mr. Hsu described takeaways from the recent failures of Silicon Valley Bank and Signature Bank, highlighting that the runs at these two banks were distinct from prior runs. Mr. Hsu noted:

• these banks had a very high percentage of uninsured deposits that were withdrawn at remarkable speed in comparison to prior runs on banks, even compared to the runs that had taken place at broker-dealers in 2008;
• the fact that these banks had liquid assets that were not sufficient to protect them as they did not have processes in place to turn those assets into immediate cash; and
• the market's fear of bank failures very quickly spread to a large number of banks that were perceived as being in some way similarly situated, even though there was no "interconnection" between the failed banks and other banks.

Mr. Hsu pointed to a few remedial measures that the regulators might take, such as giving banks less credit for uninsured deposits. He warned, however, that there was no obvious solution "as we transition towards a faster payments system and possibly tokenization of real-world assets and liabilities." He argued that "a future of faster, always on, real-time money flows...creates new risks," including "faster fraud" and limitations on the ability to remediate erroneous transactions. He concluded that "the instantaneous nature of real-time payments necessitates enhanced liquidity risk management, third-party risk management, and fraud and compliance risk management.