There’s an Opening at the Top of the OCC, but No Vacuum

In the fragmented and multilayered architecture of U.S. financial regulation, one agency is arguably first among equals. The Office of the Comptroller of the Currency, a Treasury Department bureau with a 158-year history and staff of 3,500, supervises 70% of the country’s banking activity. Most of the biggest banks, with national charters, are in its purview, as are federal savings associations and branches and agencies of foreign banks.

Amid the polarization and legislative sluggishness that is Washington, D.C.’s “new normal,” the OCC has been without a permanent, presidentially appointed leader for almost a year and a half.

In May 2021, in the fourth month of the Biden administration, Secretary of the Treasury Janet Yellen designated Michael J. Hsu as acting comptroller. He is the third to hold that title since the May 2020 departure of Comptroller Joseph Otting, a Donald Trump appointee confirmed by the Senate in November 2017.

Having served since 2002 in supervisory roles at Treasury, the Federal Reserve, International Monetary Fund and Securities and Exchange Commission, Hsu is articulating a clear strategic vision, presumably laying a foundation for the next comptroller to inherit. With that succession seemingly up in the air – President Joe Biden’s nominee, Cornell University law professor Saule T. Omarova, has been slammed by trade associations, Congress members and the Wall Street Journal editorial page – Hsu could leave a mark belying his nominally interim status. [Editor's note: Professor Omarova withdrew from consideration on December 7.]

“As acting comptroller, I have a responsibility to address urgent problems and issues facing the OCC and the federal banking system,” Hsu told the Senate Banking Committee in August. “I see four challenges requiring the agency’s immediate attention: guarding against complacency by banks, reducing inequality in banking, adapting to digitalization, and acting on the risks that climate change presents to the financial system.”

“Each priority addresses what I see as a significant threat to trust in banking,” the New York University law school graduate said in a September Exchequer Club speech. “Each will require time and substantial interagency coordination to address fully.”

Habitually introducing himself as a “career public servant,” Hsu says “safeguarding trust in the banking system” and “guarding against complacency” are the “two imperatives [that] anchor my priorities and inform all that I do. They derive from my experiences around the financial crisis of 2008,” when he witnessed “the rise of securitization, the black magic of financial engineering, and the collapse of the shadow banking system.”

“The trauma of that event continues to cast a long shadow,” Hsu stated, “especially on the people who depend every day on the banking system to work safely and fairly for them. Trust and vigilance can help us deal with the past, while also guiding us going forward.”

Connections and Influences

The handoff between acting comptrollers reflected philosophical and policy differences in line with the Trump-to-Biden transition. The political undercurrents are not unlike those that will come into play as Federal Reserve Chair Jerome Powell approaches the end of his term next year.

Brian Brooks, who was elevated from first deputy comptroller to acting head of the OCC when Joseph Otting stepped down, previously worked with Otting and former Treasury Secretary Steven Mnuchin in the C-suite of OneWest Bank, and they favored rollbacks of post-financial-crisis regulatory reforms. Brooks had also served as Washington managing partner of the O’Melveny & Myers law firm, executive vice president, general counsel and corporate secretary of Fannie Mae, and chief legal officer of cryptocurrency exchange Coinbase.

Brooks carried crypto-asset advocacy into the OCC and its “responsible innovation” program, describing himself as “the first fintech comptroller” and “crypto comptroller,” clarifying digital-asset custody rules and promoting special-purpose charters for fintech and payments entities. Upon his resignation last January, Blake Paulson, then OCC chief operating officer and now senior deputy comptroller for supervision risk and analysis, became acting comptroller, until May. Brooks, who quit in August as president of Binance.US, is widely expected to remain active in the crypto sector.

Caution on Crypto

Hsu has alluded in his public statements to both opportunities and risks of technological change, and the need for regulatory agencies, individually and collaboratively, to adapt and innovate. In a September speech to the Blockchain Association, he drew parallels between financial-engineering excesses that preceded the 2008 crisis and the advent of cryptocurrencies and decentralized finance.

“The crypto/DeFi world’s past, whether you accept it or not, is derivatives,” Hsu said, urging “the reputable members of the U.S. blockchain and cryptocurrency industry” to “do things differently” and deliver on “your commitment to responsibly building and investing in the next generation of digital services.”

He finds it “both concerning and ironic that the crypto/DeFi space is replete with scams,” adding that “most innovation seems focused on enhancing trading. Crypto/DeFi solutions to problems in the real economy are rare.”

The rapid growth of stablecoins is “in equal measures awe-inspiring and unsettling,” Hsu commented in a November 1 statement supporting the President’s Working Group on Financial Markets' report on stablecoins. “Enforcement activity,” says a section of the report spotlighting “illicit finance risk,” “would signal to stablecoin administrators and other financial institutions in the stablecoin industry that they will be held accountable for failing to meet AML/CFT [anti-money laundering/countering financing of terrorism] and sanctions obligations, will incentivize compliance, and may enhance pressure on some foreign jurisdictions to follow suit.”

In a November 3 “regulatory perimeter” discussion, Hsu said his office was close to communicating “determinations and feedback to bank charter applicants.” Along with results of a “crypto sprint” conducted with other agencies, they would address supervisory treatment of crypto ventures, "synthetic banking providers" and “large fintechs” and lead to “healthier bank-fintech partnerships," he stated. "Currently, there is an extremely wide range of practice, giving rise to concerns about regulatory arbitrage being facilitated by certain BaaS [banking-as-a-service] or rent-a-charter arrangements.”

Hsu has also weighed in on the phase-out of the Libor benchmark, adding his voice to other regulators’ in asserting: “no new Libor exposures – ‘zombie’ or otherwise – after December 31, 2021, and we mean it.” And he underscored support for a Department of Justice-led fair lending initiative, noting that “modern day redlining is not always about drawing red lines on a map. It more often involves a bank simply creating barriers that limit lending services to certain groups or communities. This modern redlining, while equally pernicious, is often more subtle, harder to detect, and resource-intensive to find.”

Changes in Tone and Organization

In July, Hsu marked the anniversary of Project REACh (Roundtable for Economic Access and Change), a financial equality and inclusion initiative launched by Brooks that, Hsu said, “enables two things that otherwise might not happen: collaborative problem identification and problem solving, and incubation of ideas and pilots by business and community representatives that can later be implemented on a broader scale than possible by any one institution.”

But the current acting comptroller reversed course on two controversies that he inherited: a proposed Community Reinvestment Act rule that had the OCC at odds with the Federal Reserve and Federal Deposit Insurance Corp.; and the true lender rule, which ran into congressional and state-level opposition.

In organizational moves, in July, Hsu eliminated the chief operating officer position, which Otting created in 2019, thereby restoring to the comptroller direct oversight of supervision units and the Office of Management. The Enterprise Risk Management Office was merged with the Office of Enterprise Governance and Ombudsman, and Senior Deputy Comptroller Larry Hattix added to those responsibilities the title of chief risk officer ahead of the retirement of Bill Rowe.

Also in July, the OCC named Darrin Benhart, a former deputy comptroller for supervision risk management and a large-bank-supervision veteran, as climate change risk officer, reporting to Blake Paulson. The appointment “will significantly expand the agency’s capacity to collaborate with stakeholders and to promote improvements in climate change risk management at banks,” Hsu said.

At the same time, the OCC announced its membership in the Network of Central Banks and Supervisors for Greening the Financial System (NGFS), contributing to “a two-pronged approach to act on climate change: engaging and learning from others and supporting the development and adoption of effective climate risk management practices at banks.”

Enforcement activities were hardly dormant under Brooks – civil money penalties were levied on the likes of Citibank, JPMorgan Chase Bank and Morgan Stanley for various risk and governance deficiencies – and are ongoing on Hsu’s watch. Among recent actions: a $4 million civil money penalty against Trustmark National Bank, Jackson, Mississippi, for Fair Housing Act violations; a cease and desist order against MUFG Union Bank in California relating to technology and operational risk governance; and a $250 million civil money penalty against Wells Fargo Bank for not meeting requirements of a 2018 risk and compliance consent order.

“This is unacceptable,” Hsu said in announcing the Wells sanction, which also “puts limits on the bank’s future activities until existing problems in mortgage servicing are adequately addressed. The OCC will continue to use all the tools at our disposal, including business restrictions, to ensure that national banks address problems in a timely manner, treat customers fairly, and operate in a safe and sound manner.”

Rules and Their Limitations

Cutting across Hsu’s themes and priorities is his contention that regulators are “at risk of getting lulled into a sense of over-confidence by banks’ compliance with the enhanced standards established by post-crisis reforms.” He brings that up to the present from 2008 and his experiences working on financial stability and post-crisis initiatives at the IMF and the Fed.

“After the global financial crisis,” Hsu said in his Exchequer Club speech, “the bank supervisory and regulatory agenda was very clear: repair, rebuild, and reform the banking system.” Hence the 2010 Dodd-Frank Act “reset many of the terms of engagement between the banking industry, regulators, consumers, and the taxpayer.”

Looking ahead, he said, “The ultimate objective for us and the banking system is to foster and safeguard trust: Trust between financial providers and their consumers, trust between regulators and supervised institutions, trust that banks will not exploit working Americans and the vulnerable, and trust amongst financial regulators that we can work together to solve problems that we can’t solve alone.

“Strong rules and regulations can help, of course, but they are not adaptive to emerging risks,” the regulator continued. “Rules cannot perceive and respond to trends and developments that may erode or threaten trust. Rules are inert, while the behaviors that give rise to distrust, i.e., deception, exploitation, arbitrage, hubris, and incompetence, are organic. We need to be careful to not put too much faith in existing rules and regulations to safeguard trust in banking – as that would be evidence of us, regulators, becoming complacent.”