In the wake of a decade of major change and the pandemic, Acting Comptroller of the Currency Michael Hsu thinks it’s time for federal and state regulators and the financial institutions they supervise to consider where things are headed, where to consider some course corrections and where to continue moving straight ahead. One example is liberalizations on charters and another is Banking as a Service arrangements.
In congressional testimony and in a virtual meet-and-greet with banking journalists, Hsu, who took his acting position in May 2021, talked about issues facing the industry and regulators. These range from credit trends to the need for a more-united viewpoint of the role of fintech in banking across federal and state regulatory agencies to the future of Community Reinvestment Act regulation and the importance of addressing social equity issues.
Before his appointment Hsu spent 20 years serving in multiple regulatory roles as both an economist and an attorney. Immediately before being named Acting Comptroller, Hsu was Associate Director in the Division of Supervision and Regulation at the Federal Reserve. It’s not typical for acting Comptrollers to become nominated to the job full-time, but Hsu sounds like a man with a definite plan and view of the job. A predecessor, Acting Comptroller Brian Brooks, was nominated to a full appointment, though nothing came of it in the end.
‘Fragmented’ Policies on Fintech, Innovation and New Charter Types
Tremendous changes have been underway to how financial services are delivered in the U.S. and by whom. A key concern for Hsu is that the regulatory role has not followed a unified playbook.
“My primary concern is that the regulatory community is taking a fragmented agency-by-agency approach to these trends,” Hsu testified before the House Financial Services Committee. While specific issues have brought regulators together tactically — such as dealing with Facebook’s interest in cryptocurrency — that has not involved overall strategy.
New OCC Chief on fintech/crypto regulation: “The key strategic question which the regulatory community must answer collectively is: Where should we set the regulatory perimeter? To my knowledge, there is not a shared understanding of the answer to that question and no overarching strategy to achieve it.”
— Michael Hsu, Acting Comptroller of the Currency
Something Hsu said during the media meeting specifically on crypto seems to apply to the broader innovation questions: “What we need to avoid is effectively competing with each other in a way that leads to a race to the bottom. … I don’t think that’s the case, but that is a risk.”
In the past, the Comptroller’s Office has actually been a pioneer on the innovation and fintech fronts, forming the first agency innovation function and proposing its controversial fintech charter in the wake of hearings convened by former Comptroller Thomas Curry during the Obama administration. During Trump-era Comptroller Joseph Otting’s tenure the charter paused for a time but eventually hit the street, and Acting Comptroller Brooks took the idea of specialized charters further, and expanded OCC thinking and policy in the crypto space. (The fintech charter illustrates the fragmentation between the national bank regulator and state regulators, with the charter being attacked in multiple state regulator lawsuits.)
Hsu has directed both an internal review of these efforts and asked fellow federal banking regulators to launch an interagency “sprint” to focus specifically on cryptocurrency activities on a quicker-than-usual basis. A key task will be devising a common set of terms among the agency, simply so the regulators and the industry can begin communicating effectively on crypto issues.
Are New Players and Partnerships Causing Risks?
Specifically on licensing and charters — which includes the matter of FDIC approval of deposit insurance for controversial state-chartered industrial loan companies — Hsu is skeptical.
“Notwithstanding the strong oversight and enhanced provisions the OCC requires, some are concerned that providing charters to fintechs will convey the benefits of banking without its responsibilities. Others are concerned that refusing to charter fintechs will encourage growth of another shadow banking system outside the reach of regulators,” testified Hsu. “I share both of those concerns.”
“I will expect any fintechs OCC charters to address the financial needs of consumers and businesses in a fair and equitable manner and support the important goal of promoting availability of credit.”
Hsu believes consideration of such issues must be done in coordination among FDIC and the Federal Reserve, as well as with the state bank regulators. While each federal agency has maintained its own policy efforts on fintech and innovation, state regulators have worked within a broad context for change under the Conference of State Bank Supervisors and also on their own.
Hsu also believes that consideration of these issues should include input from all stakeholders. “I will expect any fintechs that the OCC charters to address the financial needs of consumers and businesses in a fair and equitable manner and support the important goal of promoting the availability of credit,” he testified.
Hsu’s concerns extend to partnerships between traditional institutions and fintechs and other tech interests.
“There are some partnerships that are healthy,” he said in response to a question from a member of the House committee, “and there are some partnerships that are not healthy.”
BaaS Partnerships Under Scrutiny:
During the press meeting Hsu indicated that banking-as-a-service relationships were among the activities OCC will be looking at.
“We need to be really careful about watching this and ensuring we have what is a safe and sound way of doing it,” said Hsu. “That’s really a core question and something we’re looking at.”
While he wants specific decisions and issues still in the pipeline to be given a hard look and seeks interagency agreement, he didn’t criticize past analysis by the agency.
“I think these are hard issues,” Hsu acknowledged.
But establishing unanimity in viewpoint is a key goal. By virtue of his position as Acting Comptroller, Hsu serves as a member of FDIC’s board and he also sits on the Financial Stability Oversight Council. He said he plans to use those positions to pursue that goal.
Bad Loans Are Made in Good Times
A key risk confronting banking right now is complacency, Hsu believes. Overall, the industry is well capitalized and is coming out of the pandemic with strength intact. And that health can lead bankers to ease up, mentally, when they should be looking for the holes in their umbrellas.
“It is easy to get lulled into a sense that risk management is fine when times are good and bad things are not happening, and, in general, that’s the environment we’re in right now,” says Hsu. “I say ‘lulled’ because you don’t really know that risk identification isn’t clear and that risk measurement is not as good as it should be until things go wrong generally. And by that point, it’s too late.”
“A healthy sense of paranoia is good,” says Hsu.
He says what’s concerning him varies from one banking firm to another, and he won’t divulge company-level information. But he points out that many question marks remain ahead for the economy, with government stimulus, industry forbearance and other efforts forestalling the full effects of the pandemic downturn on credit performance.
While some institutions are evaluating risks properly, Hsu believes that others, catering to market demand or fear of losing market share, are taking imprudent risks. Often, he suggests, erosion of risk management practices begins with small moves.
Resetting CRA Regulation for Today’s World
Hsu believes the pandemic period underscored continuing inequalities and inequities in America. “Reducing inequality must be a national priority,” he testified. “Banks can play an important role in preventing this and closing the wealth gap. Historically, many low-income individuals have been treated by banks as either credits to be avoided or credits to be exploited. The OCC’s twin missions of ensuring equal access to financial services and fair treatment speak to both of these challenges.”
Hsu testified that while the OCC’s 2020 CRA rule revisions — which have been paused — improved on the 1995 regulatory scheme put in place during the Clinton administration, he added that he thought “there is significant room for improvement.”
The regulator gave three reasons for this and for the staff examination of the matter that he has ordered.
- The pandemic disproportionately affected minority groups and indications are that they will be left behind by the recovery.
- The advance notice of proposed rulemaking put out by the Federal Reserve in 2020 drew a large response, which can be examined for fresh ideas.
- Because the OCC rule was being phased in, there is some experience with it that can be examined for further thinking.
Everything in terms of CRA is on the table, according to Hsu. Among the possibilities he sketched out for the media meeting:
- A review could indicate that “it’s not perfect, but relative to the other alternatives out there, it’s good enough. So just leave it as is.”
- The decision could be made to rescind the rule entirely. Hsu said that would result from the conclusion that “this is just not working as intended, and it’s going to make things worse rather than better. So let’s reset the whole thing.”
- Finally, something between could result, especially if OCC decides to pursue a joint rule revision with the Fed and FDIC.
“CRA should be strengthened and it should be modernized,” said Hsu. “I’ve told staff that that’s the North Star for gauging where we are.”
The need for modernization should be obvious, said Hsu, given the many changes in financial services since 1995.
“The strengthening part is that the purpose of CRA is to encourage lending to low- and moderate-income communities,” said Hsu. “With the overlay of the pandemic, I think that that has extra urgency to it.”
Hsu added that he has no pre-conceived thresholds in mind for activity, but noted that he wanted to be sure that individual aspects of CRA, including retail lending, community development and distribution of financial services all receive attention.
In related thinking, Hsu indicated his strong interest in addressing allegations of bias in residential real estate appraisal involving properties own by black Americans.
While OCC doesn’t directly regulate appraisers, “it is part of the broader system of mortgage finance, which we do have a huge role in, and so these things are all connected to each other.” He sees OCC’s role as calling attention to the trend and to work with other regulators to address the issue in a coordinated way.