Acting Comptroller of the Currency Michael Hsu's
That is a great question, because the acting comptroller did not provide any criteria for determining when a bank is TBTM and did not submit a new approach for public comment as the agency did when
Without clarity from their regulator, banks have to decode yet another example of "regulatory speak," starting with "too big."
Traditionally, the OCC has acknowledged size and complexity add risk to an institution and that may present dangers to the broader system. Still, it has until now said size alone is not an indicator of inherent risk. While the current head of the agency — a bureau of the Treasury Department — mentions complexity and governance, the focus on size is new and suggests there may be some objective ceiling for financial institutions beyond which they dare not tread. How high is that ceiling?
Is the Biden administration suggesting breaking up the largest bank in the United States, JPMorgan Chase Bank, National Association? Mr. Hsu may be, but if the answer is "no," then the threshold for TBTM is somewhere north of $3.3 trillion in assets, 240,000 employees, and 5,000 branches. Most banks have a long way to go.
If yes, the question becomes, "Why are they too big to manage at this size when other companies in other fields are much bigger and operate successfully?" Consider the pharmacy chain CVS, which operates about 9,660 stores in the United States and employs roughly 300,000 people. Its revenue of $315 billion last year exceeded JPMorgan's $174 billion.
Some would answer "Why?" by saying, "Banks are more complex, and size amplifies risks associated with complexity." But are banks really more complex? Again, CVS operates a global supply network, including highly regulated pharmaceuticals, managing tens of thousands of different types of products in its inventory from thousands of suppliers.
While a bank may be very complex and banking may be more complex than many industries, one can easily find more complicated companies succeeding in equally complex fields. As an objective threshold complexity presents other problems because it is hard, if not impossible, to measure and just as difficult for people to agree on what makes a firm complex.
That leaves the second half of the phrase, "to manage."
Mr. Hsu's TBTM concept applies the Peter Principle, where individuals are continuously promoted after each success until they reach a point beyond their competence. In banking and in the Peter Principle, according to Hsu, "effective management is not infinitely scalable."
So, how does the federal banking regulator propose knowing when a bank has become TBTM? Hsu suggests four bank management traits: First, depending too often on immateriality to dismiss concerns. Second, assuming issues are isolated "bad apples" rather than symptoms of bigger problems. Third, relying on third parties to identify weaknesses. And finally, displaying hubris, arrogance and indifference toward emerging issues.
When manifested, these traits lead to escalating problems and "what some might call 'recidivist' outcomes," Hsu said.
However, these are traits of management not characteristics of size or complexity of a firm. Management and boards guilty of these behaviors are as likely to fail at a $10 billion bank as at a $100 billion bank.
While size matters, it turns out that management matters most. And that explains why examiners are left to judge when a bank has exceeded its management's competence and become too big. Repeatedly in policy statements over the years, the agency has implored banks to ensure they accept risk commensurate with their ability to manage and mitigate that risk, making it management and the board's responsibilities to ensure that a bank never becomes "too big to manage" in the first place.
So, does the solution proposed by the acting comptroller fix the problematic traits he describes?
No. Instead, the framework includes four escalating steps to "use the credible threat of restrictions and divestitures" and leaves out a key power that the agency has to require changes in management and boards of the banks it supervises. Rather than hold leadership accountable, the new framework calls for shrinking a national bank to the point that management can control it. Executives and boards can breathe a temporary sigh of relief, but shareholders will be none too happy with regulatory restrictions for long and that may bode poorly for executive longevity. Of course, the agency retains its authority to remove executives and board members, and nothing stops it from requiring both divesture and making executive changes.
But why propose a framework that leaves out an important tool to hold management and boards accountable for the banks they run?
Perhaps, just as the acting comptroller believes good management fails once a bank reaches a certain size, he fears that a bank could become so big that even the best examiners cannot supervise it. That would be a sad vote of no confidence in his agency's experienced examination staff and raises questions about the agency's ability to ensure staff have the resources, training, tools and policies to succeed in their critical duties.
Of course, all this concern can be avoided.
Bank executives can operate within their expertise and competence. Boards can ensure the quality of management by providing effective oversight and ensuring bank executives only take on risk they can handle. Bank management and boards can proactively demonstrate effective governance and controls over their operations and approach the challenge of TBTM by starting with what is entirely within their power — the excellence of their management.
Acknowledgement: The author wishes to thank Bryan Hubbard and Chris Beckmann for their contributions to this article.
