Large regional banks – next ‘too big to fail’ firms – in need of growth solutions, acting comptroller says

Large regional banks, which have grown in size and complexity since the 2008 financial crisis, are at risk of becoming the new “too big to fail” (TBTF) financial firms, the acting head of the federal regulator of national banks said Friday.

Even so, the solution to the issue is “known and familiar,” said Acting Comptroller of the Currency Michael Hsu in remarks for a conference at the University of Pennsylvania’s Wharton School of Business, as he outlined the steps he says can be taken.

“By adopting a single-point-of-entry (SPOE) resolution strategy, by holding sufficient bail-in-able long-term debt at the parent, and by ensuring the separability of major business lines and/or portfolios, the resolvability of large regional banks can be significantly enhanced and associated financial stability risks defeased,” he said, using a word that describes voiding a condition.

Hsu said making the reforms needed to address those changes will take time through rulemakings. But in the meantime, he said the bank merger pipeline is active, including for large banks.

“Without the resolvability safeguards discussed today, I have concerns that such mergers could result in new TBTF firms, which would add to financial stability risk,” Hsu said. “At the same time, prohibiting such mergers could shield the GSIBs (global systemically important banks) from competition, potentially helping to solidify their dominance in various markets.”

Hsu proposed that a way to reconcile both of those challenges might be to condition approval of a large bank merger on actions and credible commitments to achieving SPOE, total loss absorbing capital (TLAC), and separability.

“This approach is something that we are currently reviewing and contemplating at the OCC,” Hsu said.

Acting Comptroller Discusses Large Bank Resolvability