On July 17, Acting Comptroller of the Currency Michael J. Hsu spoke at the Exchequer Club, highlighting three significant long-term trends that he believes will reshape the banking landscape. First, Hsu highlighted the notable expansion of large banks. Second, he emphasized the increasing complexity of relationships between banks and nonbank institutions, which introduces new risks and complicates current models of regulatory oversight. Finally, Hsu discussed the growing polarization trends within the banking sector, which can potentially weaken trust and stability.

Hsu warned that these trends might appear gradual and manageable but could lead to serious consequences if ignored, drawing parallels to the banking issues that contributed to the 2008 financial crisis after years of unnoticed development.

To address the expansion of large banks, the OCC will work on regulatory reforms to bolster the resilience of large banks by reinforcing capital and liquidity requirements, enhancing operational resilience, and ensuring comprehensive recovery planning. Hsu stressed that large banks need measures that enable them to fail in an orderly manner if necessary. Such measures include maintaining sufficient long-term debt to absorb outsized losses and strong resolution capabilities. The OCC will focus on ensuring that large banks are not “too-big-to-manage,” meaning they must be capable of managing their risks and adhering to regulations. Regulators can support this notion by taking enforcement actions, imposing civil penalties, restricting business activities, and other regulatory oversight actions to reinforce the importance of sound risk management practices.

To address the increasing interdependency between banks and nonbanks (particularly fintechs) and the subsequent potential for confusion amongst responsibilities among consumers, regulators, and market participants, Hsu proposed the need for more granular approaches to regulation and more engagement between the federal banking agencies and fintechs, such as federal oversight of state-licensed money transmitter entities.

Finally, to address polarization and a trend of fragmentation amongst banking law developments at the state level, Hsu emphasized the need for a renewed focus of the OCC to “vigorously defend preemption, as it is central to the dual banking system and cuts to the core of why we exist and who we are.”