Regulators willing to break up repeat-offender banks, acting comptroller says

Michael Hsu
Michael Hsu (pictured), the acting comptroller of the currency, has vowed to fix "too big to manage" banks. But "he needs to prove that the OCC has the fortitude to see its task through," writes the policy chief of a regulatory watchdog group.

WASHINGTON — The Office of the Comptroller of the Currency and other regulators would consider breaking up big banks that repeatedly fail to correct bad behavior, according to acting Comptroller Michael Hsu.

Though financial regulators have long had the power to split up banks for incessant violations, Hsu's remarks at the Brookings Institution on Tuesday were the most explicit warning in recent memory of regulators' willingness to break apart large, chronically delinquent financial institutions.

"Enterprises can become so big and complex that control failures, risk management breakdowns and negative surprises occur too frequently — not because of weak management, but because of the sheer size and complexity of the organization," Hsu said. "In short,  effective management is not infinitely scalable."

Hsu's wake-up call coincides with comments by other Biden-era regulators about the need to take stronger actions against repeat offenders like Wells Fargo. Despite the fact Wells Fargo had been under a Federal Reserve-imposed asset cap since 2018 for previous violations, the bank agreed to a $3.7 billion settlement with the Consumer Financial Protection Bureau late last year in connection with accusations of breaking consumer banking rules.

Banking industry watchers and officials noted that Hsu's tone turns the screws on large scandal-embroiled institutions, as regulators express an explicit willingness to go nuclear on the largest banks which fail to correct their behavior.

"Hsu is saying that regulators now have a formal process to break up big banks when [matters requiring attention], consent orders and growth limits prove ineffective," Jaret Seiberg, a policy analyst for Cowen Washington Research Group, wrote in a research note after Hsu spoke.

Seiberg also wrote that while Hsu's comments were directed toward large, poorly managed banks, they were not a blanket indictment of large institutions.

"He rejected the idea that this is about making all big banks smaller. Instead, he praised the benefits of very large banks as long as they have a record of strong management." Seiberg wrote.

Progressive reform advocates were pleased by the OCC's announced intent to levy strong punishments for violations but said they want to see regulators take tangible action.

"The OCC, a regulator with a long track record of being far too friendly with big banks, now needs to demonstrate the will to solve the problem it has diagnosed, up to and including the breakup of repeat offenders," Sarah Pray, managing director for policy at Americans for Financial Reform, wrote in an email to American Banker. "Process is nice, but results, delivered promptly, that finally end chronic abuse of consumers by too-big-to-manage banks would certainly be better." 

After Hsu's speech, Federal Reserve Bank of Minneapolis Vice President Ron Feldman said to the Brookings audience that the acting comptroller's statements marked a "new day" for bank regulation. However, without further details, the speech was little more than a stern talking-to, since breaking up a systemically important bank could throw markets into turmoil, he said.

"The idea that we're just going to be more explicit, and therefore that's going to lead us to break up these banks, despite the comptroller saying here today that they have a record of staying poorly managed for years and years, is sort of lacking depth. What is changing?" Feldman said.

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