On January 17, 2023, Acting Comptroller of the Currency Michael J. Hsu spoke at the Brookings Institution. In his speech, Hsu talked about the limits of large bank manageability, or what some call the too-big-to-manage (TBTM) problem. Hsu stressed the contribution of large banks to the economy and how, as they are becoming bigger and more complex, managing large banks is becoming more challenging.
In his remarks, Hsu described how enterprises can become so big and complex that control failures, risk management breakdowns, and negative surprises occur too frequently but not because of weak management, but because of the sheer size and complexity of the organization. Hsu pointed out that developing a robust approach to detecting, preventing, and addressing TBTM risks will increasingly become an imperative for both banks and bank regulators. According to Hsu, the most effective and efficient way to successfully fix issues at a TBTM bank is to simplify it by divesting businesses, curtailing operations, and reducing complexity.
Hsu discussed signs that a banking organization may be at risk of becoming TBTM. He described five of these signs including: (1) The (im)materiality illusion; (2) The isolated incident/bad apple illusion; (3) External versus internal risk identification; (4) Hubris, contempt, and indifference; and (5) Rushed integration and diseconomies of scale.
Later in his talk, Hsu laid out how the OCC is approaching addressing TBTM risks at large banks. He said that to determine if a bank is TBTM, as opposed to just poorly managed, and to ensure due process and fairness in making that determination, a clear escalation framework is imperative. According to Hsu, the OCC uses a four-level escalation framework in addressing supervisory concerns and deficiencies at large banks. This escalation framework has the following levels:
Level 1 - Notice or MRA
Level 2 - Public enforcement actions
Level 3 - Growth restrictions
Level 4 - Simplification via divestiture or “breaking up the bank”
A copy of Hsu’s full remarks is available here.