Acting Comptroller of the Currency Addresses Financial Stability Risks in Banking and Commerce at Vanderbilt University

In a recent talk at Vanderbilt University, Michael Hsu, Acting Comptroller of the Currency, delved into the critical issue of managing risks in the financial sector, particularly concerning the blurring lines between banking and commerce. The event, hosted by Professor Morgan Ricks, provided Hsu with a platform to share insights gained from his extensive experience, spanning the 2008 Global Financial Crisis to his current role overseeing the federal banking system.

The acting Comptroller's remarks shed light on the growing trend of nonbank fintech companies collaborating with traditional banks to provide banking services such as checking and savings accounts. While these partnerships offer innovative solutions to customers, Hsu is particularly wary of the "exponential growth" in such collaborations and the potential for blurred lines of responsibility when multiple firms, each with different incentives, share the burden of risk monitoring.

This emphasis on risk management comes in the wake of recent regulatory actions, including a consent order issued by the Office of the Comptroller of the Currency (OCC) to Blue Ridge Bank, based in Virginia. The order was a response to the bank's failure to address previous concerns flagged by the regulator regarding its fintech partnerships. Blue Ridge Bank, however, maintains that the consent order does not accurately reflect the progress it has made in addressing these issues since June.

The Federal Deposit Insurance Corp. (FDIC) also made public two consent orders in January, both related to bank-fintech partnerships. These developments underscore the increasing scrutiny and regulatory focus on the risks associated with collaborations between banks and fintech entities.

Identifying Risks in the Modern Landscape

Hsu expressed concerns about the potential risks of blurring, particularly in the realms of payments and private credit/equity. He acknowledged the rapid growth of nonbanks in the payments sector over the past decade, with innovations like peer-to-peer (P2P) payments and the digitalization of commerce.

Highlighting the growth of e-commerce and its impact on the payments landscape, Hsu stressed the need for regulatory focus on maintaining bank safety, protecting consumers, and ensuring a level playing field in the evolving financial landscape.

In addressing these risks, Hsu outlined various regulatory tools available to mitigate both micro and macro-prudential risks. He emphasized the role of bank regulators in overseeing nonbank activities, the importance of functional regulators in supervising specific markets, and the significance of deposit-taking being exclusive to banks under existing laws.

Hsu also discussed the need for standardized federal oversight in areas lacking comprehensive regulation, such as nonbank payments-related activities. He underscored the importance of clear guardrails to prevent excessive risk-taking and blurring between banking and commerce.

The Trip Wire Approach: A Proposal for Early Detection

In proposing a proactive approach to risk identification, Hsu introduced the concept of a "trip wire approach." This approach involves establishing specific metrics and thresholds, or trip wires, which, when exceeded, trigger assessments of potential systemic risks by the Financial Stability Oversight Council (FSOC).

Hsu clarified that the trip wire approach would provide transparency and awareness to companies or industries before reaching the designation phase. He suggested applying this method to areas of potential risk, such as payments, private credit/equity, mortgage servicing, and hedge funds. The goal is to prevent systemic risks from growing unchecked while maintaining a balanced and measured regulatory response.

Balancing Innovation and Stability

In concluding his talk, Michael Hsu emphasized the importance of innovation, growth, and change in the financial sector. However, he cautioned against unchecked blurring between banking and commerce, citing historical crises as lessons for the present. The FSOC's analytic framework, coupled with the proposed trip wire approach, provides a comprehensive strategy to identify, assess, and respond to emerging financial stability risks.

Hsu's insights at Vanderbilt University shed light on the evolving landscape of banking and commerce, urging regulators and industry participants to navigate these changes prudently to ensure a stable and resilient financial system.

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