Acting Comptroller Warns of Risks to the Banking System
Commentary by Steven Lofchie
Acting Comptroller of the Currency Michael J. Hsu warned of risks posed by three trends reshaping banking: (i) the growing number and size of large banks, (ii) the complexity of bank-nonbank relationships and (iii) polarization.
On the risks related to the growth of large banks, Mr. Hsu said that by 2030, large banks are likely to have "$20 to $23 trillion in assets, which is roughly the size of the entire U.S. banking system today." He argued that this was why the OCC has been "so focused on pursuing large bank regulatory reforms ... in areas like liquidity and long-term debt." Mr. Hsu said that the OCC is "actively exploring operational resilience requirements for large banks' critical operations." He also stated that the OCC "revised [its] policy on enforcement actions related to banks with persistent weaknesses."
On the risks related to bank-nonbank relationships, Mr. Hsu described "greater interdependencies between banks and nonbanks, including fintechs," which are "blurring the line between banking and commerce." He said that fintechs partner with banks indirectly through "middleware" firms; banks rely on nonbank service providers; and both banks and nonbanks rely on large cloud service providers. Mr. Hsu pointed to the recent Synapse bankruptcy as an example of the blurred line challenge that financial banking agencies and nonbank fintechs must discern.
On the risks related to polarization, Mr. Hsu said that banks are increasingly being asked by states "to pick a side in service of performative politics rather than deliberative policy." He said that that the OCC can "help ensure that parochial overreach today does not splinter our banking system." He cited the Supreme Court's Cantero decision that Circuit Courts must analyze whether state laws "prevent or significantly interfere" with federal powers. He stated that the OCC "will continue to vigorously defend preemption, as it is central to the dual banking system."
Commentary
With regard to the issue of preemption, referred to in his speech as "polarization," the following comment by Mr. Hsu is notable: "To varying degrees the culture wars, identity politics, and weaponization of finance are pushing toward greater and greater fragmentation of the U.S. financial system. Increasingly banks are being asked by states to pick a side in service of performative politics rather than deliberative policy."
The clear implication of this is that it is the States that are engaged in "performative politics," while it is the federal regulators that are engaged in "deliberative policy." That's debatable, particularly as federal regulators and legislators bring pressure on banks to stop or limit funding to businesses that are engaged in activities that are legal under federal law, including, for example, in the energy industry.