Acting comptroller outlines four ‘urgent problems’ for banking, with emphasis on fragmented approach to digitalization

'Fair Access' rule remains off the table for enactment

Four urgent problems – including digitalization of banking finance – face the banking system, the acting leader of the federal regulator of national banks told a House panel Wednesday.

Acting Comptroller of the Currency Michael J. Hsu told the House Financial Services Committee, in an oversight hearing, that the four urgent problems are adapting to digitalization, guarding against complacency, reducing inequality, and acting on climate change.

Hsu zeroed in on digitalization, telling the committee that financial regulators must “collectively adapt” to the emergence of the practice of digitalization, or converting data (and, in some cases, currency) into a digital format, typically with an eye toward efficiency of operations.

“I am concerned that the regulatory community is taking a fragmented agency-by-agency approach to the technology-driven changes taking place today,” Hsu said in prepared testimony. He said his agency has updated its framework for chartering national banks and trust companies and interpreted crypto custody services as part of the business of banking. He told the committee he has asked agency staff to review those actions.

He also addressed charters to fintechs, which he said some are concerned will convey benefits of banking without its responsibilities, while others believe refusing such charters will encourage growth of a “shadow banking system” outside the reach of regulators.

“Recognizing the OCC’s unique authority to grant charters, we must find a way to consider how fintechs and payment platforms fit into the banking system, and we must do it in coordination with the FDIC, Federal Reserve, and the states,” Hsu said.

Regarding the other three areas, Hsu noted:

  • Large banks in particular are becoming complacent, leading to the setting aside of prudent risk management in pursuit of profit. “I see the losses related to Archegos primarily through this lens, as reflective of the broader environment,” he said, referring to the family-owned investment vehicle that took large positions in companies via “total return swaps,” the sudden sale of which sent the stock market into a dive. “This risk requires bank leaders, boards of directors, and us, as supervisors, to be especially vigilant,” Hsu said.
  • Reducing inequality must be a national priority. “Historically, many low-income individuals have been treated by banks as either credits to be avoided or credits to be exploited,” Hsu said. “The OCC can help address that problem. We must work to strengthen regulations implementing the Community Reinvestment Act (CRA).”
  • Using a two-pronged approach for addressing climate change: Explore joining the Network for Greening the Financial System (NGFS), a group of central banks and supervisors from across the globe who share best practices; and support the development and adoption of effective climate risk management practices at banks.

Hsu also noted that he has requested a review of some key regulatory standards, including the 2020 CRA final rule and associated notice of proposed rulemaking related to performance benchmarks, interpretative letters and guidance regarding cryptocurrencies and digital assets, and pending licensing decisions. With respect to the CRA rule (which the agency announced it would pause the mandatory data collection for now while the rule is under reconsideration), he said that before making any changes to the rule, the OCC plans to seek public input, consistent with the requirements of the Administrative Procedure Act (APA). “As noted, all options are under consideration,” he said.

One regulation that is not under review is the “fair access” rule. He said OCC has declined to enact the rule and he has “no intention of revisiting that decision.”

Oral Statement of Michael J. Hsu Acting Comptroller of the Currency before the Committee on Financial Resources U.S. House of Representatives May 19, 2021