Complacency, inequality, digitalization, climate risk all cited as priorities in OCC annual report

Guarding against complacency, addressing inequality, adapting to digitalization, and managing climate risk are the top priorities for the leader of the national bank regulator, which are reflected in the agency’s 2022 annual report issued Thursday.

However, in his “viewpoint” article introducing the Office of the Comptroller of the Currency’s (OCC) report, Acting Comptroller Michael Hsu said the aim of the federal banking system is to “foster and safeguard trust.” He said that includes trust between regulators and supervised institutions, that banks will not exploit working Americans and the vulnerable, and “trust among financial regulators that we can work together to solve problems that we can’t solve alone.”

Regarding the priorities, Hsu said a risk of complacency exists as the federal banking system becomes lulled into a state of overconfidence. “Complacency often starts with small trade-offs, which may ultimately threaten the safety, soundness, and fairness of the banking system,” he said. He cited enforcing discipline in risk taking, maintaining cybersecurity vigilance, and avoiding a disorderly transition away from LIBOR as key elements in avoiding complacency.

In reducing inequality in banking, Hsu said it was important to safeguarding trust. “Banks can play an important role in closing the wealth gap. The OCC’s twin mission of ensuring that banks provide fair access to financial services and treat customers fairly speaks to these challenges,” he said. He said that included the agency continuing to work to modernize the anti-redlining Community Reinvestment Act (CRA), revitalizing minority depository institutions (MDIs) and community development financial institutions (CDFIs), developing greater federal oversight and effective monitoring for discrimination in appraisals, expanding the agency’s Project REACh (which aims to address barriers to financial inclusion), and developing better tools to help banks assess and monitor financial health.

On digitalization, Hsu said technological advances “can offer greater efficiencies for banks and their customers but the benefits of those efficiencies are lost if the bank lacks an effective risk management framework.” He said technology “has a large impact and warrants our attention.”

“The OCC requires fintechs seeking a bank charter to be subject to the same requirements as all banks, and we are engaging with our peer agencies to develop a coordinated approach to modernizing the federal regulatory perimeter,” he said.

Hsu indicated crypto-assets remains an area of focus for the agency. “Crypto industry risk management practices lack maturity, stablecoins may be unstable, and contagion risk is high within the crypto industry,” he said. Likewise, he indicated, artificial intelligence (AI) is an area being closely monitored by the OCC “due to its potential to affect safety and soundness, consumer protections, the effectiveness of compliance functions, and fairness in access to financial services.” Hsu said the agency will continue to update supervisory guidance, examination programs, and examiner training to respond to growing use of AI.

Finally, on the relatively controversial subject of climate-related financial risk, Hsu asserted that it poses “novel challenges to traditional risk management.” He said the agency’s role is not to tell bankers whom to bank or not to bank. “We are committed to staying in our safety and soundness lane, which means focusing on banks’ risk management of climate-related financial risks and not on setting industrial policy,” he said.

He acknowledged that community banks have “expressed concern” about the scope of the agency’s climate-related efforts. “I believe that earning their trust on this issue is vitally important,” he said. “As such, I am committed to continued dialogue and constructive engagement with all stakeholders, including community bankers, as we build our climate risk management expertise.”

OCC Issues Annual Report for 2022

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