WASHINGTON–Big banks that repeatedly try but fail to fix material deficiencies in certain areas should consider divesting themselves of those business units, according to the acting Comptroller of the Currency.
The reason, according to Michael Hsu, is that in not correcting those deficiencies the banks are prolonging risks to consumers, counterparties, and the financial system, Hsu said in remarks in an event hosted in Washington by the Brookings Institution.
Hsu called the issue the “the too-big-to-manage (TBTM) problem.”
“There are limits to an organization’s manageability,” Hsu said. “Based on my experience as a bank supervisor and as Acting Comptroller of the Currency, I believe there is a growing body of evidence to support this premise.”
According to Hsu, banks can become “so big and complex” to control that failures, risk management breakdowns, and negative surprises occur too frequently. He said that was not because of weak management, but because of the sheer size and complexity of the organizations.
‘Not Infinitely Scalable’
“In short, effective management is not infinitely scalable,” Hsu stated.
In addition, Hsu suggested developing a robust approach to detecting, preventing, and addressing TBTM risks will increasingly become an imperative for both banks and their regulators.
The acting comptroller told the meeting he believes simplifying large banks by divesting businesses, curtailing operations, and reducing complexities overall was a better strategy than what is often done, including changing senior management, increasing remediation budgets, developing better plans, and hiring more risk and control function personnel.
Those latter approaches, Hsu said, have only limited effect at a bank that is TBTM.
“It is the size and complexity of the bank that is the core problem that needs to be solved, not the weaknesses of its systems and processes or the unwillingness or incompetence of its senior leaders,” Hsu said, adding regulators must also develop better responses.
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