Domestic banks classified as systemically important by OCC's Hsu's proposal
Michael Hsu, the Acting Comptroller of the Currency, recently spoke at a conference in Germany, where he discussed the importance of effective bank supervision and the proposed framework for designating certain US banks as Systemically Important Banks (SIBs) on a national scale.
Hsu highlighted the need for examiners to prioritize areas with the highest risk, but acknowledged the "greatest challenge for risk-based supervision" as what is not prioritized. He warned that examiners can become unnecessarily cautious, defensive, or second-guess themselves in tough situations, choosing to hew closely to a checklist mentality over one that prioritizes investigation into a bank's higher-risk areas.
Hsu stated that the expectations of examiners being omniscient or all-powerful over the day-to-day operations of a bank are unrealistic, unfair, and counterproductive. He compared bank supervision to physical exercise, stating that both require consistent effort and involve incremental progress.
The proposed framework for designating Domestic Systemically Important Banks (D-SIBs) is based on principles similar to those in the Basel Committee's approach for Global Systemically Important Banks (G-SIBs). It involves identifying banks whose failure would have serious consequences for the national economy and the financial system, leading to the requirement for these banks to hold additional capital buffers beyond those of other banks. This framework is principle-based, allowing national regulators discretion to consider country-specific factors such as the size of the banking sector relative to the economy, the concentration of the sector, and reliance on volatile funding sources when setting buffer levels.
Hsu emphasized the importance of ongoing supervisory interactions in promoting safe and sound practices and strong risk management and controls. He also underlined the need to ensure that large non-GSIBs don't fall through the cracks.
In a move to enhance efficiency, Hsu suggested realigning the supervision of midsize and community banks based on function rather than geography. He also preferred a horizontal "team-of-teams" strategy for bank oversight rather than vertical teams for each individual bank.
Hsu credited effective supervision for the banking sector's limited impact during the fall of 2022, when the crypto market saw $2 trillion in losses and assorted bankruptcies. Regular correspondence between banks and examiners, according to Hsu, played a significant role in the relatively slight impact of the CrowdStrike outage on the banking sector.
The proposed D-SIB label, according to Hsu, could provide helpful transparency and rigor for banks that need it. He also stated that post-2008 financial crisis reforms have improved large bank resilience, but the risks of backsliding and stasis are increasing. Hsu equated regulation to a speed limit and supervision to reinforcement of safe driving, emphasizing the need to ensure that the cumulative effect over time is indisputable.
In summary, Hsu's proposals aim to enhance the resilience of banks and reduce the risk of systemic contagion from their failure, while providing regulators with discretion to tailor requirements to national circumstances while maintaining consistency with global standards.
It is crucial for examiners to focus on high-risk areas in the business sector, as emphasized by Michael Hsu, the acting comptroller of the currency. The proposed framework for designating Domestic Systemically Important Banks (D-SIBs) necessitates adequate finance for these banks to hold additional capital buffers, ensuring the stability of the overall business environment.
