The United States Office of the Comptroller of the Currency (OCC) is a regulatory agency under the umbrella of the Department of Treasury. Its history dates back to Abraham Lincoln’s administration, when Lincoln signed the National Currency Act, in 1863, during the height of the Civil War. One of the reasons behind the agency was to bring stability into banking. Before the Civil War, there were 1,600 state banks. By 1866, only 300 state banks remained.
As the OCC site explains, the National Currency Act “was a response to the mishmash of local banks, local money, and conflicting regulatory standards.”
Fast forward about 160 years and find the OCC as an influencer and regulator in many important economic issues. The business mantra is to ensure “that national banks and federal savings associations operate safely and soundly, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations.”
Earlier this month, Janet Yellen, the U.S. Treasury Secretary, appointed Michael Hsu as the acting comptroller of the OCC. If President Biden chooses to install Hsu as permanent, Hsu will assume the agency’s 32nd director.
After about three weeks in his role, Michael Hsu shows excellent leadership qualities for this vital role. The full text of Hsu’s Congressional remarks is here, but today’s American Banker summarizes the comments well.
- Hsu, who is scheduled to appear at the hearing with other financial regulators, said that “in a dynamic economy, there is a constantly evolving set of products, practices, and clients that banks avoid, or limit exposure to, based on their risk appetite.”
- “In some cases, banks have done the work necessary, developed the risk management capabilities, and put in place the appropriate resources to engage prudently with these products, practices, and clients,”
- “In other cases, because of market demand and/or a fear of losing client share, banks have set aside their initial risk management concerns and engaged with more risk imprudently.”
The Banker continues:
- “At the OCC, the focus has been on encouraging responsible innovation. For instance, we created an Office of Innovation, updated the framework for chartering national banks and trust companies, and interpreted crypto custody services as part of the business of banking. I have asked staff to review these actions,” Hsu said.
- “My broader concern is that these initiatives were not done in full coordination with all stakeholders,” he added. “Nor do they appear to have been part of a broader strategy related to the regulatory perimeter. I believe addressing both of these tasks should be a priority.”
Payment geeks should read into these comments. One important facet is the intricacies of consumer lending. As the WSJ reported last week, some top banks are considering alternative credit scoring models; in fact, some banks are testing the use of no scoring. On the one hand, removing scoring from credit decisioning is reckless. On the other hand, if you tightly control the standards, it can embrace the under and unbanked. But, do not expect $10,000 credit lines to propagate all classifications of lending. If the test continues, it will require lower credit lines and pricing sensitive to risk.
Another facet is innovation and risk management. It is impossible to plan for every possible permutation, but there are known areas that warrant regulatory guidelines to keep the industry safe and sound.
The regulatory aspect of financial services can seem fuddy-duddy, but it adds value. Regulatory controls such as Current Expected Credit Loss (CECL) pre-empted a 2020 banking crisis. And, Mr. Hsu brings a fresh approach to the agency known for its focus on “safety and soundness.” Safety and soundness are not just buzzwords. They affect stability, fairness, and risk management.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
