Hsu’s Tenure Policing Banks Guided by Examiner’s Eye, Risk Focus

A key federal banking regulator preparing for President-elect Donald Trump to take office says his dogged focus on risk management helped banks navigate a series of market disruptions during the Biden administration.

Banks were ready to open the lending spigots when acting Comptroller of the Currency Michael Hsu took office in May 2021, as Covid-19 death rates started to drop and Americans’ bank accounts swelled with pandemic-era stimulus money. But Hsu, a veteran of the 2008 financial crisis, warned banks and his examination team to remain on guard.

“Guarding against complacency is in some ways the hardest to talk about,” Hsu said in a Jan. 6 interview with Bloomberg Law. “Because if you do a good job, nothing happens.”

When a series of shocks hit financial markets—first in cryptocurrencies and then among regional banks supervised by other agencies—no nationally chartered banks supervised by the Office of the Comptroller of the Currency went down.

“Us just hammering on risk management, risk management, risk management helped keep OCC banks in a safer posture,” Hsu said.

Hsu’s three-and-a-half-year term as acting comptroller, the longest anyone has led the OCC in an acting capacity, won praise from financial observers who saw stability in the system during an turbulent time.

But banks challenged his regulatory work, even taking the previously rare step of suing the OCC and other prudential regulators in court to block an anti-redlining regulation.

Hsu also drew criticism from some progressives including Sen. Elizabeth Warren (D-Mass.) for not going far enough to crack down on banks, with proposals on bank capital and other key issues hanging in the balance ahead of Trump’s second term.

Hsu said his job was to represent the American people, even though he was never nominated for the full-time position or won Senate confirmation. And he’s comfortable with what he’s accomplished.

“I need to do this job so that I am as accountable to the American people as if I were confirmed,” he said.

Examiner’s View

Hsu, who served as associate director in the Fed’s Division of Supervision and Regulation and led its large bank supervision program, came to the OCC with a bank examiner’s perspective. That helped him push his supervisory team to keep the pressure on banks to maintain their risk management.

“There’s a way of talking about things where I naturally knew it already, and so the communication is just much easier and much clearer,” he said.

The communication helped prepare banks for the 2022 crypto winter and the 2023 regional bank crisis. Although four banks—Silvergate Bank, Silicon Valley Bank, Signature Bank, and First Republic Bank—failed in the first half of 2023, none were regulated by the OCC, Hsu noted.

“When you look at the last several years, he’s really been focused on the fundamentals of risk and compliance,” said Peter Dugas, executive director at global financial services advisory firm Capco and a former Treasury Department official under President George W. Bush.

There’s a lingering question whether OCC-supervised banks survived the 2023 crisis due to heightened supervision or because of sheer luck, said Steven Kelly, the associate director of research at Yale’s Program on Financial Stability.

“If the OCC’s success in avoiding those major bank failures was really due to tone or initiative from the top, then that should absolutely be Hsu’s legacy, and the other supervisory agencies should be studying the OCC’s success on that front,” Kelly said.

Regulatory Fights

Along with supervision, Hsu and his fellow regulators at the Federal Reserve and the Federal Deposit Insurance Corp. worked to finalize a steep capital hike for the biggest US banks. Those efforts stalled out amid stiff opposition to the proposal and have been put on hold during the presidential transition.

The OCC also collaborated with the Fed and the FDIC on a rewrite of the Community Reinvestment Act, a 1977 anti-redlining law. That rule is currently locked in litigation.

Hsu and his colleagues also tightened bank merger review guidelines. Among the changes at the OCC was the removal of a decades-old requirement that some merger applications get automatic approval on the 15th day after the close of the public comment period if the OCC fails to act.

For progressive critics including Warren, now the ranking Democrat on the Senate Banking Committee, Hsu was too cautious.

“The OCC is identifying these very real and significant and dangerous risks but isn’t taking the next steps to finalize the stronger capital rules, for example,” said Shayna Olesiuk, the director of banking policy at Better Markets, a financial reform advocacy group.

Hsu did make a notable effort to publicize his work as acting comptroller, with frequent trips around the country and public speeches on topics including risk management, artificial intelligence, crypto, and bank-fintech partnerships.

Those appearances raised the agency’s profile, said Mayra Rodríguez Valladares, the managing principal of financial consultancy MRV Associates.

“He’s been more transparent,” she said. “He’s been more interactive with the media and public at large.”

Removing Politics

Another theme of Hsu’s tenure was a desire to remove some of the politics from bank supervision and regulation. To do so, he visited around 30 OCC field offices to speak with examiners, bankers, and community leaders—sometimes leading to uncomfortable but fruitful discussions on issues such as climate change, Hsu said.

Moving forward, Hsu said he hopes the incoming Trump administration can address issues such as bank liquidity that have been bogged down in political fights.

“Serious people in this space will recognize that there’s issues that need to be addressed,” he said. “They may disagree about how to address it, but I think that’s a healthy part of the policy process.”

The danger is that other countries may gloss over bank capital, liquidity, and other measures if the US doesn’t take them seriously.

“Everyone loses in that scenario,” Hsu said.