Large US banks found to have consistently poor risk management and other failings will face more hard-hitting government intervention, including demands to shore up their capital or exit certain lines of business.

On Thursday, Acting Comptroller of the Currency Michael J Hsu said his agency, the Office of the Comptroller of the Currency (OCC), has created a new set of guardrails targeting larger and more complex banks before they fail.

The Policies and Procedures Manual (PPM) 5310-3, Bank Enforcement Actions and Related Matters, now includes “Appendix C: Actions Against Banks With Persistent Weaknesses.” It provides greater transparency and clarity about how the OCC determines if a bank has persistent weaknesses and the possible additional actions the agency may take to address them.

Consequences

“This revised policy promotes strong management by making clear that a bank’s inability to correct persistent weaknesses will result in proportionate, fair, and appropriate consequences, including growth restrictions and divestitures when warranted,” said Hsu.

“These guardrails are especially important today, as banks grow to better serve their communities, improve their competitiveness, and achieve economies of scale. Well-managed banks provide invaluable support to our economy, and this revised policy promotes this result,” he said.

The possible actions the OCC could take against banks that exhibit persistent weaknesses include additional requirements and restrictions, such as requirements that a bank improve its capital or liquidity position, as well as restrictions on the bank’s growth, business activities, or payments of dividends.

Simplify or reduce

The OCC also may require a bank to simplify or reduce its operations, including that the bank reduce its assets, divest subsidiaries or business lines, or exit from one or more markets of operation, as warranted.

The new OCC guidelines will largely apply to banks with at least $50bn in consolidated assets, but the OCC said it reserved the right to apply them to any of the financial institutions it regulates that are sufficiently complex or risky. 

The move from Hsu’s agency comes after several notable bank failures this year that reverberated across the stock market as a whole and hit the financial industry in particular.

Stability risks

On April 21, the Financial Stability Oversight Council voted unanimously to issue for public comment a proposed analytic framework for financial stability risks. The new framework is intended to provide greater transparency to the public about how the Council identifies, assesses, and addresses potential risks to financial stability, regardless of whether the risk stems from activities or firms.

On April 28, the Federal Reserve published A Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank, saying the regional lender failed because of mismanagement by the bank in which its senior leadership failed to manage basic interest rate and liquidity risk.

The Federal Reserve also said the bank’s board of directors failed to oversee senior leadership and hold them accountable, and it admitted Federal Reserve supervisors failed to take forceful enough action, detailing each of the findings in the report.

The Federal Deposit Insurance Corporation released its own report detailing its supervision history and analysis of the underlying causes of the failure of a different regional lender – Signature Bank – which occurred around the same time in March.

Too Big to Manage

In remarks Hsu made in January at the Brookings Institute, the Acting Comptroller said: “The most effective and efficient way to successfully fix issues at a Too Big to Manage (TBTM) bank is to simplify it – by divesting businesses, curtailing operations, and reducing complexity.”

He said other, more typical, actions, such as changing senior management, increasing remediation budgets, developing better plans, and hiring more risk and control function personnel will have limited impact at a bank that is TBTM.

“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,” he said.