Recovery planning standards should apply to more banks ($100 billion and up), regulator suggests

Recovery planning guidelines should apply to banks of $100 billion and up in assets, the regulator of national banks said Monday, not just to banks with $250 billion and more.

More than five years ago, the agency raised the threshold for the guidelines to the larger sizes of banks, citing regulatory relief.

“Given last year’s banking turmoil, I believe expanding the application of the guidelines to all large banks with at least $100 billion in assets warrants serious consideration,” said Michael Hsu, acting comptroller of the currency.

“While counterfactuals are hard to prove, one does not have to strain to see how strong recovery planning might have mitigated the failures of Silicon Valley Bank (SVB, of Santa Clara, Calif.) and Signature Bank (of New York, N.Y.),” Hsu said. “At a minimum, such planning would have made their resolutions more orderly and less costly to the Deposit Insurance Fund (DIF, the federal bank deposit insurance program administered by the Federal Deposit Insurance Corp. (FDIC)).”

Hsu, who heads the Office of the Comptroller of the Currency (OCC), spoke to a conference in Zurich, Switzerland.

Hsu’s remarks focused on recovery planning and how it can serve to mitigate the “too-big-to-fail” issue.

“As a financial regulator in the 2008 financial crisis, I had a front seat to the collapses of Lehman Brothers and AIG,” Hsu said. “With Lehman, the firm filed for bankruptcy and the result was financial instability, while with AIG, extraordinary government actions were taken to protect the financial system and the result was a loss of trust in government.

“Neither outcome was right,” he said. “Strong and effective recovery planning at those firms could have helped in two ways.” He said those were well-designed triggers and well-prepared recovery options to sell portfolios and lines of business. Both, he said, would have enabled the firms to shrink quickly and in an orderly manner, “even post-failure.”

“Breaking up a large bank is impossible without proper planning,” Hsu advised. “Strong recovery planning, coupled with resolution-required separability, make an orderly downsizing and break-up of a large financial institution feasible.”

In 2018, the agency said it amended its enforceable guidelines relating to recovery planning standards to limit the application of the guidelines to the largest, most complex banks, providing regulatory burden relief to smaller, less complex banks.

Acting Comptroller of the Currency Michael J. Hsu: Mitigating TBTF with Recovery Planning

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