Bank ‘too big to manage’? Divestiture, curtailing operations best for fixing, acting comptroller asserts

Large banks that repeatedly try but fail to fix material deficiencies prolong risks to consumers, counterparties, and the financial system, the leader of the national bank regulator said Tuesday.

And the best way to successfully fix the shortcomings, he said, is to simplify things – including by divesting businesses.

In remarks at an event hosted in Washington by the Brookings Institution, Acting Comptroller of the Currency Michael Hsu addressed limits of large-bank manageability, which he said some call “the too-big-to-manage (TBTM) problem.”

“There are limits to an organization’s manageability,” Hsu said. “Based on my experience as a bank supervisor and as Acting Comptroller of the Currency, I believe there is a growing body of evidence to support this premise.”

He indicated that banks can become “so big and complex” to control that failures, risk management breakdowns, and negative surprises occur too frequently. He said that was not because of weak management, but because of the sheer size and complexity of the organizations.

“In short, effective management is not infinitely scalable,” Hsu asserted.

The acting leader of the Office of the Comptroller of the Currency (OCC) said developing a robust approach to detecting, preventing, and addressing TBTM risks will increasingly become an imperative for both banks and their regulators.

Hsu suggested to the group that simplifying large banks by divesting businesses, curtailing operations, and overall reducing complexities was preferable to more typical actions. Those, he said, included changing senior management, increasing remediation budgets, developing better plans, and hiring more risk and control function personnel. However, he asserted, that approach would have only limited impact at a bank that is TBTM.

“It is the size and complexity of the bank that is the core problem that needs to be solved, not the weaknesses of its systems and processes or the unwillingness or incompetence of its senior leaders,” Hsu insisted.

He said that view puts a premium on being able to detect when the risks of becoming TBTM may be rising. “Prevention is key,” he said. “It also highlights the need for bank regulators to develop credible, transparent mechanisms to compel divestitures and simplification at large banks when necessary.”

Acting Comptroller Discusses Management of Large Banks