Acting Comptroller of the Currency Michael Hsu Discusses Banking Challenges and Future Actions in Wall Street Journal Interview

In a candid interview with the Wall Street Journal's Risk and Compliance Journal, Acting Comptroller of the Currency Michael Hsu delved into the multifaceted landscape of banking regulations, risk management, and the intricate dance between financial stability and technological evolution. The tumultuous year of 2023 witnessed the banking sector thrust into the spotlight, grappling with crises that engulfed Silicon Valley Bank, Signature Bank, and Credit Suisse Group. Against this backdrop, Hsu provided unique insights into the regulatory intricacies shaping the industry and outlined potential strategies for the future:

Banking Turmoil in 2023

The year 2023 witnessed significant turmoil in the banking sector, with high-profile failures affecting Silicon Valley Bank, Signature Bank, and Credit Suisse Group. As the industry grappled with crises, regulatory attention intensified, especially in the realms of risk management and the adoption of new technologies.

Soundness of the National Banking System

Addressing concerns about the soundness of the national banking system, Hsu expressed confidence in its stability. Following the high-profile failures, banks and supervisors focused on risk areas, implementing controls to ensure resilience and sufficient financial resources. Hsu assured that efforts were made to fortify the system for the benefit of all stakeholders.

"Too Big to Manage" Framework

Hsu has previously emphasized the concept of banks being "too big to manage." While internal discussions on potential future actions against banks with persistent weaknesses are ongoing, Hsu stressed the importance of the onus being on the banks to prove their manageability. The framework includes escalating consequences, encouraging banks to address issues promptly, or face regulatory actions.

Balancing Risk Management and Business Objectives

Reflecting on the perception of risk managers as potential impediments during prosperous times, Hsu underscored the need for a balance between risk management and business objectives. Drawing lessons from past failures, he highlighted the importance of credibility within institutions, ensuring that those knowledgeable about risks have an impactful voice alongside revenue generators and business leaders.

Banking Technology Challenges

The interview delved into the challenges posed by advancing banking technologies, such as smartphone-based accounts and the pervasive use of artificial intelligence (AI). Hsu acknowledged the need for a nuanced approach to address the accelerating pace of transactions and information flow. The emphasis has shifted to short-term liquidity to prevent rapid bank runs, as witnessed in cases like Silicon Valley Bank and Signature.

Concerns About Artificial Intelligence

On the topic of AI, echoing Securities and Exchange Commission Chair Gary Gensler's concerns, Hsu expressed multi-faceted worries. While acknowledging the financial stability risks highlighted by Gensler, Hsu emphasized the broader implications of AI in areas like microcredit decision-making, potential bias, and discrimination. Operational resilience in the AI supply chain also emerged as a critical consideration.

Optimism for a Well-Controlled Financial System

Despite the challenges, Hsu remains optimistic about achieving a well-controlled financial system. The focus on robust controls enables banks to instill confidence and trust, allowing them to concentrate on lending and promoting the overall health of the financial system. Hsu emphasized the simultaneous strengthening of controls and operational processes to drive the industry forward safely.

The interview with Acting Comptroller of the Currency Michael Hsu provides valuable insights into the regulatory perspective on the banking industry's challenges, risk management, and the evolving landscape of banking technologies, particularly artificial intelligence. As the industry navigates these complexities, the commitment to building a resilient and well-controlled financial system remains a top priority.

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