WASHINGTON — Big banks may need to be broken up into smaller pieces if they become too big to manage and unable to address significant regulatory failures, a top federal bank regulator said in a warning shot on Wall Street on Tuesday.
A bank’s failure to address long-standing deficiencies, despite admonitions from its regulators and onerous restrictions such as growth restrictions, is evidence that a firm is unmanageable and needs to be wound up, said the currency’s acting comptroller, Michael Hsu.
Mr. Hsu’s comments are not targeting any particular bank to be wound up, but appear to highlight concerns about firms like Wells Fargo & Co., which are struggling to resolve long-standing problems despite repeated enforcement actions and billions in fines.
Wells, which is overseen by the Office of the Comptroller of the Currency, has said it is dramatically shrinking its homebuilding business after a series of scandals and a record fine from the Consumer Financial Protection Bureau to settle allegations it hurt more than 16 people have inflicted millions of people with fixed deposit accounts, car loans and mortgages. It has operated under a growth cap imposed by the Federal Reserve since 2018.
A spokesman for Wells Fargo did not immediately respond to a request for comment.
Banks can become so large and complex “that control failures, risk management breakdowns and downside surprises are all too common,” Mr. Hsu said in a speech to the Brookings Institution, a think tank in Washington. “Not because of weak leadership, but because of the sheer size and complexity of the organization.”
“In short, effective management is not infinitely scalable,” he said.
Mr Hsu said his office is already using a framework to escalate problems at big banks, which includes increasing penalties for companies that don’t fix problems quickly. Officials are discussing steps to create more transparency about the framework, he said.
The Office of the Comptroller of the Currency is an independent office of the Treasury Department. It oversees about 1,100 banks with total assets of $15 trillion, about two-thirds of the entire US banking system, making it one of the most powerful regulators alongside the Federal Reserve and the Federal Deposit Insurance Corp.
Tuesday’s comments chime with other statements by the Biden administration and its top regulators, which are trying to assuage concerns that the steady growth of the country’s largest banks has created new risks for the financial system.
Much of this work to date has focused on how to address a recent spate of regional bank mergers, an issue Mr. Hsu has repeatedly raised as concerns about financial stability.
Some officials have also called for tougher penalties against companies that repeatedly break the law. Rohit Chopra, the head of the CFPB, has argued that some recidivists may not be able to operate in a safe and sound manner and should lose access to federal deposit insurance or their ability to stay in business.
Economists and financial analysts look at bank earnings to get a sense of the health of the economy. WSJ’s Telis Demos explains how inflation and recession concerns can be reflected in their results. Pictured: Lorie Hirose
On Tuesday, Mr. Hsu said the most effective and efficient way to solve problems at a bank deemed too big to manage is to simplify it by divesting businesses, curtailing operations and reducing complexity.
A bank’s size and complexity is the core issue that needs to be addressed, he added, “not the weaknesses of its systems and processes or the lack of will or incompetence of its leaders,” he said.
The larger and more expansive a bank’s operations become, the more likely it is to assume that individual problems are isolated and reflect a bad apple than worry that similar problems might be lurking elsewhere in the organization, Mr. Hsu said.
While there are rogue actors, significant issues are typically “multicausal and reflect deeper, unseen vulnerabilities that, if left unaddressed, may manifest as further incidents in the future,” he said.
Separately, the Federal Reserve on Tuesday issued instructions to the six largest US banks on how to analyze the impact of multiple climate change-related scenarios on parts of their portfolios. The pilot program will have no regulatory consequences for banks and was billed as a learning exercise, Fed officials said.
One scenario calls for a hurricane to hit an unspecified location in the northeastern US, a test of how banks’ real estate portfolios could be affected. Another scenario envisions the US achieving “net-zero” greenhouse gas emissions by 2050.
Paul Kiernan contributed to this article.
Write to Andrew Ackerman at [email protected]
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