Hsu: Divestiture best solution for banks ‘too large to manage’

The most effective way to successfully fix issues at a bank that is “too large to manage” is to simplify it by divesting businesses, curtailing operations and reducing complexity, Acting Comptroller of the Currency Michael Hsu said today, adding that regulators must have “credible, transparent mechanisms” to compel divestiture at large banks when necessary.

Speaking at the Brookings Institution in Washington, D.C., Hsu said banks that are too large to manage differ in several key aspects from banks that are simply poorly managed. Among them, so-called too-large-to-manage banks assume that problems that arise are the result of a few isolated bad apples within the organization rather than signifying a larger issue. Their leaders also display “hubris, contempt and indifference” towards outside perspectives. Typical remediation measures, such as changing senior management, will have little impact in bringing about the necessary institutional reforms, Hsu said. “It is the size and complexity of the bank that is the core problem that needs to be solved, not the weaknesses of its systems and processes or the unwillingness or incompetence of its senior leaders.”

The OCC uses a four-step “escalation framework” to give banks ample opportunities to address problems, Hsu said. The first step is to put a bank on notice and make clear the nature of the weakness requiring remediation. Failure to make the necessary changes means the agency will proceed to the second step by taking public enforcement actions, such as consent orders. If the problem persists, then the OCC will pursue a restriction on a bank’s business activities or capital actions. The fourth and final step would be to break up the bank by compelling divestment.

“Given the stakes involved with restrictions and divestitures, we need to approach such situations and actions with great care,” Hsu said.  “Close coordination with our interagency stakeholders is required to ensure fair, orderly and effective outcomes. Greater clarity about the process and standards of review would support due process and fairness and bolster the credibility of supervisory actions taken.”