Michael J. Hsu
Jan 5, 2023
Guarding Against Complacency
Michael J. Hsu
Acting Comptroller of the Currency since May 10, 2021
Consistent with the OCC mission, the ultimate objective for the Office of the Comptroller of the Currency (OCC) and the federal banking system is to foster and safeguard trust: trust between financial providers and their consumers, trust between regulators and supervised institutions, trust that banks will not exploit working Americans and the vulnerable, and trust among financial regulators that we can work together to solve problems that we can’t solve alone.1
Banking rests on this trust. My key priorities at the helm of the OCC—guarding against complacency, addressing inequality, adapting to digitalization, and managing climate risk—reflect what I see as the key long-term threats to trust in banking.2
Guarding Against Complacency
While the federal banking system remains healthy, we run the risk of getting lulled into a state of overconfidence. Complacency often starts with small trade-offs, which may ultimately threaten the safety, soundness, and fairness of the banking system.
The U.S. financial system today is substantially more protected from instability because of the extraordinary efforts of Congress, the federal banking agencies, the Financial Stability Oversight Council (FSOC), and banks themselves. However, threats remain.
Empowering risk managers and enforcing discipline in risk-taking will enable banks to better navigate the rate environment and lower the chances of unwelcome surprises. Actions today to cover high-impact tail risks can temper the need to go full “risk-off” tomorrow, ensuring that the banking industry can remain a source of strength to the economy, as it has throughout the pandemic and recent market turbulence.3
Inflation and the increasing interest rate environment, among other things, pose increasing risk to banks. Banks continue to navigate the operational and market-related effects of the pandemic and substantial government stimulus. Additionally, cyber threats are elevated and continue to evolve, with an observed increase in attacks on the financial services industry. Remaining diligent in the face of these risks helps to maintain trust in the federal banking system.
Maintaining Cybersecurity Vigilance
The increasing interconnectedness and complexity of today’s operating environment and continued cybersecurity threats pose a growing safety and soundness risk to banks and the broader financial sector if not properly managed. It is important that banks invest in building a secure and resilient infrastructure, maintain effective cybersecurity controls, and collaborate through public/private partnerships, such as the coordinated efforts of the Financial and Banking Information Infrastructure Committee and Financial Services Sector Coordinating Council, to strengthen the defense of the financial sector.4
Banks should also consider the role that third-party service providers and the overall supply chain play in the resilience of the financial sector. The OCC’s bank supervision operating plan released in October 2021 highlights cybersecurity as a key area of focus for the agency’s supervisory strategy across banks and critical service providers, working closely with our interagency counterparts.5
The annual Cybersecurity and Financial System Resilience Report provides Congress with an overview of measures that the OCC takes to strengthen cybersecurity with respect to the agency’s functions as a regulator. Functions include the supervision and regulation of financial institutions and, when appropriate, services provided to banks by certain third parties.
The OCC, along with our federal banking agency partners, implemented a final rule establishing computer-security incident notification requirements for banking organizations and their service providers this fiscal year. This rule requires banks to provide the OCC with timely notification of computer-security incidents that have materially disrupted or degraded, or are reasonably likely to materially disrupt or degrade, the viability of banks’ operations, customers’ ability to access their deposit and other accounts, or the stability of the financial sector.6 The notification requirement will help promote early awareness of emerging threats to banks and the financial sector, allows for better assessment of potential impacts, and supports responses across the financial sector and institutions of all sizes.
The OCC also recognizes that we, too, are exposed to cyber threats. We took steps to ensure that our offices have effective cybersecurity controls that meet both federal and industry standards. Our annual Cybersecurity and Financial System Resilience Report, issued in July, provides Congress with an overview of measures that the OCC takes to strengthen cybersecurity with respect to the agency’s functions as a regulator.7
In October 2021, the OCC and other federal banking agencies, in conjunction with the state bank and state credit union regulators, issued a statement to emphasize the importance of an orderly transition away from the London Interbank Offered Rate (LIBOR). The statement highlighted that the failure to adequately prepare for LIBOR’s discontinuance could undermine financial stability.8 The federal banking agencies separately warned that a disorderly transition away from LIBOR, including the use of LIBOR after December 31, 2021, could create safety and soundness and consumer protection risks.9
Reducing Inequality in Banking
Reducing inequality in banking is important to safeguarding trust. Banks can play an important role in closing the wealth gap. The OCC’s twin mission of ensuring that banks provide fair access to financial services and treat customers fairly speaks to these challenges.
During this past year, we worked on a proposal to modernize the Community Reinvestment Act (CRA) regulatory framework, made strides to improve access to banking services for minority and low- to moderate-income communities, worked on a plan that advances property appraisal and valuation equity, and expanded our work to address key barriers to financial inclusion. These steps move us in the right direction toward a level playing field and building trust in the system.
Community Reinvestment Act
To facilitate the ongoing interagency work to modernize the CRA regulatory framework and promote consistency for all insured depository institutions, the OCC joined the other federal banking agencies in May 2022 to issue a joint notice of proposed rulemaking (NPR) to strengthen and modernize regulations implementing the CRA and better achieve the purposes of the law.10 We received feedback and are reviewing those comments.
This notice of proposed rulemaking came after the OCC issued a final rule to rescind the OCC’s 2020 CRA rule and replace it with one based on the rules adopted jointly by the federal banking agencies in 1995, as amended.11
(From left to right) Sarah Rosen Wartell, President of the Urban Institute, moderated a June 3, 2022, panel featuring Acting Comptroller Hsu; Lael Brainard, Vice Chair of the Board of Governors of the Federal Reserve System; and Martin J. Gruenberg, Acting Chairman of the Federal Deposit Insurance Corporation (FDIC) Board of Directors, at the Urban Institute. The panelists discussed proposed updates to regulations implementing the CRA.
CDFIs and MDIs
Community development financial institutions (CDFI) and minority depository institutions (MDI) are critically important to providing mortgage credit, small business lending, and other banking services to minority and low-to moderate-income communities.
Acting Comptroller Hsu (right) attended the opening of Agility Bank in May. Agility Bank is the first de novo MDI national bank in 15 years. Pictured holding the charter certificate is bank founder Lauren Sparks.
In May, the OCC chartered a woman-owned and -led bank, the first de novo MDI national bank in 15 years.12 I am committed to helping revitalize MDIs and CDFIs, and the OCC is taking a variety of actions on our own and in coordination with others.
The joint NPR to modernize the CRA includes provisions that would support activities undertaken in cooperation with MDIs and U.S. Department of the Treasury-certified CDFIs.13 The NPR also provides additional qualitative consideration for banks’ investments in and other support for MDIs and Treasury Department-certified CDFIs.
We revised the OCC’s policy statement on MDIs in July to update and streamline descriptions of policies, procedures, and programs.14 MDIs are on the front lines serving low-income, minority, rural, and other underserved communities. They are a critical source of credit to support the financial needs and economic vitality of their communities. The OCC has a long history of recognizing the value of these institutions, and we will continue our efforts to ensure they remain a bedrock of financial access and inclusion.
In July, we also renewed the charter of the Minority Depository Institutions Advisory Committee, which assists the OCC in assessing the needs and challenges facing MDIs.15 The OCC places great importance on the input we receive from committee members. These institutions are critical resources and key drivers of economic growth for individuals and businesses in the diverse communities they serve.
Property Appraisal and Valuation Equity Task Force
Racial and ethnic biases have no place in the property appraisal process. The OCC has been an active member of the interagency Property Appraisal and Valuation Equity (PAVE) Task Force since its inception to address such bias. This task force developed a plan that advances property appraisal and valuation equity to help close the racial wealth gap and address mis-valuations for families and communities of color.
In March, I issued a statement that the OCC is committed to carrying out the actions recommended by the PAVE task force to help ensure greater federal oversight and effective monitoring for discrimination in appraisals and technology-based valuations of residential property.16 We will use our supervisory authority to advance racial equity consistent with our mission to ensure our regulated institutions provide fair access to financial services and treat customers fairly.
Project REACh, which stands for the Roundtable for Economic Access and Change, is an innovative OCC-sponsored initiative to address key barriers to financial inclusion. Through Project REACh, the OCC convenes leaders from banking, business, technology, and national civil rights organizations to reduce specific barriers that prevent full, equal, and fair participation in the nation’s economy. Project REACh’s work is divided into four national workstreams addressing affordable homeownership, inclusion for credit invisibles, revitalization of MDIs, and access to capital for small and minority-owned businesses. Adding on to previous REACh initiatives, the OCC launched new local REACh initiatives in the last year in the greater Detroit, Dallas, and Milwaukee communities to provide regional forums to support financial inclusion for hardworking Americans.17
The OCC hosted a Project REACh symposium July 12, 2022, at OCC headquarters in Washington, D.C. Pictured are the participants on the event’s Building Opportunities for Entrepreneurship and Small Businesses panel. From left to right, they are Jevaughn Sterling, Executive Vice President and Regional Commercial Banking Manager for Amegy Bank; Ramit Arora, President and Co-Founder of Biz2Credit; Marisa Calderon, Chief of Community Finance and Mobility for the National Community Reinvestment Coalition; Randi Zeller, Director of Small Business Services for Mobility Capital Finance; Mary Miklethun, Senior Vice President of Business Banking Segmentation and Analytics at U.S. Bank; and Andrew Moss, Director for External Outreach and Minority Affairs and the National Director for Project REACh at the OCC.
To mark the second anniversary of Project REACh, we hosted a financial inclusion symposium in July at the OCC’s headquarters in Washington, D.C.18 Participants discussed actionable strategies to build measurable initiatives to increase economic and community development financing within economically disadvantaged communities. Attendees represented OCC leadership, civil rights organizations, financial institutions, community development practitioners, and other key stakeholders focused on reducing economic challenges affecting minority communities.
With Project REACh entering its third year, I am pleased with participants’ enduring commitment to improving financial inclusion for minority communities and the most vulnerable. The OCC is proud to convene a broad range of stakeholders, who are working together to reduce barriers preventing the American dream from being accessible to all.
Developing better tools to assess and monitor financial health has the potential to help banks and other financial institutions better serve their diverse consumers and communities. A financial health lens focused on individuals and communities, rather than solely on products or services, should enable a more sophisticated and effective approach to balancing the financial empowerment and protection of consumers.
The OCC’s Financial Health: Vital Signs series features discussions with Acting Comptroller of the Currency Michael J. Hsu (right) and academic, community, and industry leaders on issues affecting the financial health of consumers. The quarterly discussion series, which launched in 2022, was livestreamed and open to the public. The first event was held April 28 and featured discussions on minority ownership of cryptocurrency with John Hope Bryant, the founder, CEO, and Chairman of Operation Hope (left), and Professor Tonya Evans of Penn State Dickinson Law (center).
In March, I hosted a visit with Her Majesty Queen Máxima of the Netherlands, the United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development , to promote financial inclusion.19 I discussed the OCC’s role in promoting financial health for consumers, noting that financial technology companies, or fintechs, present both risks and opportunities with regards to consumers’ financial health. The OCC looks forward to learning from and collaborating with others as we continue to pursue the shared opportunity to make financial health a more prominent objective.
In April, the OCC hosted a discussion focused on the tension within communities of color regarding the risks and opportunities of cryptocurrency and digital assets. It was the first discussion in our new Financial Health: Vital Signs initiative.20 For this discussion, I was joined by John Hope Bryant, CEO and Chairman of Operation Hope, whose work focuses on financial literacy, and Professor Tonya Evans of Penn State Dickinson Law, who has extensive knowledge of blockchain technology.
Continuing this narrative, in May, I co-hosted a summit in Atlanta on cryptocurrency and digital assets with the financial education group Operation Hope. A wide range of panelists exchanged diverse viewpoints and discussed the durability and risks of digital assets, as well as the role and potential for regulation to enable responsible innovation and protect consumers.
These discussions and explorations were guided by a focus on the financial health of consumers and communities. In July, as a member of the Financial Literacy and Education Commission, I emphasized the importance of financial education and reviewed OCC efforts to advance financial health.21 Use of a financial health lens has the potential to transform financial services. In September, I spoke about the policy and potential of financial health at the EMERGE Financial Health 2022 event in Los Angeles. I discussed the importance of banks considering how their products and services can support consumers’ financial empowerment and health.
High School Scholars Internship Program
For the fourth consecutive year, the OCC hosted its High School Scholars Internship Program to increase diverse and inclusive development opportunities for the future workforce. The paid summer internship provides students and graduates of Washington, D.C., high schools with valuable and challenging professional experience in the financial services regulatory sector. This year, the program also included high school interns who were placed at the Federal Housing Finance Agency, National Credit Union Administration, and U.S. Securities and Exchange Commission.
Additionally, the OCC has provided minority college and graduate students with paid internships for more than a decade through the agency’s participation in the National Diversity Internship Program.
Sontia Porter, an intern with the OCC’s High School Scholars Internship Program, introduced a capstone presentation about how banking affects diverse and underfunded communities. Interns’ parents and OCC staff attended in support.
Expanding Diversity and Inclusion in the OCC’s Workforce
Reflecting the diversity of the communities we serve is an important part of safeguarding trust in the federal banking system. Fostering an inclusive workforce speaks to the OCC’s values and drives better outcomes by broadening our perspective and mitigating risk of groupthink.
At the OCC, we are working to strengthen and broaden opportunities for members from underrepresented communities to build connections, lead, and network. Our eight employee network groups support employees by highlighting workforce issues and through a variety of events, programs, newsletters, and meetings.22 OCC employees are establishing a ninth group: Native American Tribes & Indigenous Voices (NATIVe). This new group will foster and support the recruitment, development, and retention of Native Americans and Indigenous Peoples at the OCC and promote awareness and understanding of issues involving culture and sovereignty.
The OCC took two public initiatives this year to expand diversity and inclusion in the OCC workforce: joining the Military Spouse Employment Partnership and concluding a multiyear Hispanic barrier analysis. Both efforts were sponsored by the OCC’s Office of Minority and Women Inclusion with input from the employee network groups.
The U.S. Department of Defense’s Military Spouse Employment Partnership is a targeted recruitment and retention initiative to help OCC employees and applicants who are military spouses navigate their OCC careers while supporting their family’s military obligations. The OCC was pleased to be accepted in July into the partnership as part of the 2022 class, joining nearly 600 other federal and civilian employers.23
The Hispanic barrier analysis stemmed from a Treasury Department initiative that came out after the Office of Personnel Management and the Equal Employment Opportunity Commission explicitly recognized the persistently low representation of Hispanic and Latino employees in the federal workforce. The analysis provided an objective assessment of barriers to Hispanic representation in the OCC workforce and devised actionable steps to address outstanding issues. We’ve started to implement steps toward eradicating identified barriers to maintaining an inclusive culture. As work on the Hispanic barrier analysis continues, we will monitor progress over the next 12–18 months.
Adapting to Digitalization
Like many industries, banking is being digitized. Today, a range of fintechs provide a wide range of financial services—including services related to crypto-assets—with the convenience of technology outside of the bank regulatory perimeter. With gaps in supervision, risks can build out of the sight and reach of regulators.
Acting Comptroller Hsu (right) discussed digital assets, stablecoins, and bank/fintech partnerships during a fireside chat with Aaron Klein (left), with the Brookings Institution at the Philadelphia Federal Reserve Bank’s Sixth Annual Fintech Conference August 4, 2022.
The digitalization trend has been under way for some time but has accelerated in recent years. The COVID-19 pandemic sped up consumer-facing technologies such as mobile and application-based banking, electronic bill payment, remote deposit capture, and online loan applications. But digitalization is more than just converting data to digital form. It involves a move toward comprehensive use of digital technologies to compete and support evolving customer needs and expectations, especially with regards to online and mobile banking.
Such technology has a large impact and warrants our attention. The OCC requires fintechs seeking a bank charter to be subject to the same requirements as all banks, and we are engaging with our peer agencies to develop a coordinated approach to modernizing the federal regulatory perimeter.24
The “de-integration” of banking services now taking place has its roots in technology, data, and operations and is affecting all banks. Technological advances can offer greater efficiencies for banks and their customers but the benefits of those efficiencies are lost if the bank lacks an effective risk management framework.25
Addressing the associated risk requires continual learning about its evolving scope. This year, the OCC solicited academic- and policy-focused research on the effect of fintech entities and nonbanks on banking and the markets for lending, deposit-taking, and payment services.26 The OCC invited selected authors to present to OCC staff and invited guests to OCC headquarters in Washington, D.C.
This year’s dislocations in crypto markets and the associated failures of crypto firms have highlighted several key risks, which reinforce for banks and supervisors the importance of taking a careful and cautious approach to crypto activities and engagement with crypto-related firms. Specifically, crypto industry risk management practices lack maturity, stablecoins may be unstable, and contagion risk is high within the crypto industry.
To keep up with the rapid pace of growth in crypto-assets in 2021 and the first quarter of 2022, the OCC, the Federal Reserve, and the Federal Deposit Insurance Corporation (FDIC) conducted a series of interagency policy initiatives focused on crypto-assets.27 The initiatives focused on quickly advancing and building on the agencies’ combined knowledge and understanding related to banking organizations’ potential involvement in crypto-asset-related activities.
The lessons we learned from this interagency work reinforced the careful, deliberative, and cautious approach the OCC has taken to supervising crypto-asset activities in the federal banking system. In November 2021, we issued an interpretive letter that clarified banks should not engage in certain crypto activities until they demonstrate that the activities can be conducted in a safe and sound manner.28 This approach helped mitigate the risk of contagion from crypto losses and bankruptcies to the federal banking system.
Artificial intelligence is another area the OCC is closely monitoring due to its potential to affect safety and soundness, consumer protections, the effectiveness of compliance functions, and fairness in access to financial services. The OCC provided testimony in May 2022 (PDF) to the House Committee on Financial Services Task Force on Artificial Intelligence and will continue to update supervisory guidance, examination programs, and examiner training to respond to artificial intelligence’s growing use.29
Addressing Climate-Related Financial Risk
The OCC’s focus on climate-related financial risk is firmly rooted in our mandate to ensure that banks operate in a safe and sound manner. Our role is not to tell bankers whom to bank or not to bank. We are committed to staying in our safety and soundness lane , which means focusing on banks’ risk management of climate-related financial risks and not on setting industrial policy.
Climate-related financial risks pose novel challenges to traditional risk management. We have taken several steps to build our expertise and capacity to meet those challenges. Shortly after my appointment, the OCC joined the Network for the Greening of the Financial System (NGFS) and established a Climate Risk Officer position at the agency to focus on these issues.30
In December 2021, the OCC issued for comment principles for climate-related financial risk management for large banks.31The draft principles focus on the climate-related risk management capabilities of large banks, that is, those with at least $100 billion in consolidated assets. Our focus on large banks is intentional, as the risks are most complex and material in these banks. We continue to consider the comments, working with our interagency colleagues to determine the next steps in this area.
Community banks have expressed concern about the scope of our climate-related risk efforts. I have met with community bankers, traveling across the country to hear from them directly about their communities and experiences handling acute weather events. I believe that earning their trust on this issue is vitally important. As such, I am committed to continued dialogue and constructive engagement with all stakeholders, including community bankers, as we build our climate risk management expertise.
The mission of the agency—to ensure that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations—is a special one. The themes, priorities, and actions highlighted in this report are all anchored and driven by our focus on fulfilling this mission.
The OCC’s Strategic Plan for Fiscal Years 2023–2027 serves as a road map for the next five years and pushes the agency to look beyond familiar habits and day-to-day work to meet the key challenges of the future.
Every five years, the OCC updates its strategic plan. In September, we adopted a strategic plan for fiscal years 2023-2027 (PDF). The plan builds off of the themes and priorities highlighted in this report, but takes a longer term view on trends, risks, and opportunities facing the banking industry. As highlighted in the strategic plan, to be effective in the longer term, the OCC and its workforce aim to achieve strategic goals under the following ideals:
Agility and Learning—the OCC learns and adapts effectively.
Credibility and Trust—the OCC is highly credible and consistently trusted.
Leadership—the OCC leads on supervision as the banking system evolves.
The plan aims to strengthen trust in the OCC by the public and banks, bolster the value of the OCC charter, and enable us to meet our mission far into the future.
Every day that I come into the office, I walk past our mission statement, lit up elegantly, yet formidably on the wall of our main entrance at the OCC’s headquarters. Each time I do, I feel humbled, motivated, and grateful to be leading an agency with such a clear and consequential focus and with such experienced staff. Leadership changes are a natural part of every dynamic organization. We said farewell to three members of our Executive Committee this year: Blake Paulson, Kathy Murphy, and Sydney Menefee. The OCC benefitted from their strong leadership. In their places, we welcomed Jay Gallagher, Minh-Hai Tran-Lam, and Beverly Cole as new leaders to the OCC Executive Committee. We are blessed to have a deep bench to foster and safeguard trust in the federal banking system for years to come.
Michael J. Hsu
Acting Comptroller of the Currency