U.S. banking regulators should consider a framework for designating certain banks as nationally systemically important, Acting Comptroller of the Currency Michael Su said. He said at a meeting on Tuesday In Germany.
“Reforms following the 2008 financial crisis have significantly improved the resilience, resolvability and management capabilities of large banks, but as memories of the financial crisis fade, the risks of setbacks and stagnation are increasing,” Su told a joint meeting of the ECB and the European Central Bank in Frankfurt.
While Dodd-Frank and other measures have increased oversight of systemically important banks globally, regulators must ensure that large non-GSIBs don’t slip through the cracks, Su said.
“Given the turmoil in the banking industry last spring and the projected growth of large banks, we need to ensure that oversight and regulation of large non-GSIB banks is not inadequate,” he said.
A domestic SIB label “could potentially provide beneficial transparency and rigour for banks that require it, as it would highlight the stakes associated with inadequate oversight and regulation of such institutions”, Su added.
This wasn’t Xu’s only suggestion for optimizing banking supervision. Xu also stressed his preference for a horizontal “team of teams” strategy for banking supervision.
“Scale, complexity and geographic scope [of G-SIBs] “It made it clear that a single team, even if given sufficient resources and authority, would not be enough to effectively oversee them,” Su said.
Xu argued that organizing teams by specialization (for example, a team that focuses on liquidity risk or cyber risk and investigates specific aspects of multiple banks) would result in more consistent oversight across the industry than having siloed teams (with a lead investigator and expert for each aspect) for each bank.
For example, the Office of the Comptroller of the Currency has restructured its supervision of mid-size and regional banks to be functional rather than geographic, such as into four regional units. Now, regulators have three portfolios — a trust bank team, a new bank team and a technology service provider team — all reporting to the same deputy comptroller, Su said.
“Smart institutional cohorting” can prevent blind spots, Su says. “More importantly, [it allows] “Flatter organisational structures help practices thrive and be more agile in their response to change,” he said.
Xu also emphasized the difference between regulation and supervision, saying the former is equivalent to speed limits while the latter is strengthening driving safety.
He also drew a parallel between oversight of banks and exercise of the human body.
“Both require sustained effort and gradual progress,” Su says. “When it comes to exercise, it’s hard to pinpoint the impact of exercising on a particular day on an individual’s health, but the cumulative impact of exercising and not exercising over the long term is indisputable.”
Similarly, he said, “While the significance of any particular inspection or information request may be very small, the cumulative impact of those activities over time may be significant in promoting safe and sound practices and strong risk management and controls.”
Su said the impact of the CrowdStrike outage on the banking industry was relatively minor compared to its impact on the airline industry, for example, because of regular communication between banks and examiners.
“Continuous supervisory interaction reinforces good habits, discipline and prudence,” Su said.
Banking oversight often only gets attention when there are problems in the banking industry, such as the collapse of Signature, First Republic and Silicon Valley Bank last year, but effective oversight is “largely invisible to the public,” Su said.
Su noted that the cryptocurrency market experienced $2 trillion in losses and various bankruptcies in the fall of 2022. However, the impact on the banking sector was limited.
“That wasn’t luck; it was the result of long-term, diligent efforts by regulators to ensure that the cryptocurrency-related activities in which banks engage are safe, sound and fair,” he said, citing interpretive letters issued by the regulator in 2021 and 2023.
But Su warned that in tough situations like the aftermath of SVB, examiners may become “unnecessarily cautious, defensive or… doubt themselves” and choose to adhere to a checklist mentality rather than one that prioritises examining riskier areas of a bank.
With a checklist mentality, “each box is given equal weight,” Su said. “It ensures comprehensiveness, but it artificially limits our ability to focus supervisory attention where it is most needed.”
The process “can go from a tool to a cage,” he said.
“unfortunately, [examiners] “Management is too often assumed to be omniscient and omnipotent when it comes to the day-to-day running of the bank,” Su said. “This expectation is unrealistic, unfair and counterproductive.”
Despite the need for examiners to prioritise the riskiest aspects, “the biggest challenge with risk-based supervision is what’s not being prioritised”, Su said.
