Comptroller of the Currency warns top leaders to safeguard trust in banking

Comptroller of the Currency Michael J. Hsu told regulatory agency heads, bank CEOs, academics and other financial industry leaders about the importance of safeguarding trust in banking during remarks at the Clearing House and Bank Policy Institute’s (TCH + BPI) Annual Conference in New York.

Hsu discussed threats to trust in banking at The Pierre, A Taj Hotel, situated at the doorstep of Central Park in New York.

“Like many industries, banking is being digitalized. At a high level, this is occurring through the expansion of technology firms into financial services and to a lesser degree the hype and growth of the crypto industry,” said Hsu. “While crypto has grabbed the headlines for most of the past year, I believe fintechs and big techs are having a large impact and warrant much more of our attention.”

Hsu’s comments also included updates on his priorities of guarding against complacency, addressing inequality, adapting to digitalization, and managing climate-related risk in the federal banking system.

“The Terra stablecoin collapse in May, among other factors, sparked contagion across cryptocurrencies, resulting in several crypto platforms failing, forcing numerous exchanges to close, and driving large losses and reductions of staff at a number of publicly traded companies,” said Hsu.

“The repercussions are still being felt today in the crypto space,” said Hsu, who added that, “The federally regulated banking system, by contrast, has been largely unaffected.”

“As all of you know, banking continues to march steadily towards taking place online, on mobile devices, and in the cloud. Similar to other industries, financial services, which used to be integrated and largely contained within the banking industry, are being compartmentalized and offered by a greater number of entities beyond traditional banks, including by technology firms,” said Hsu. “These developments are creating an increasingly varied and complex set of arrangements, which are significantly more intricate than the standard bank outsourcing relationships of yesteryear.”

“Digitalization has put a premium on online and mobile engagement, customer acquisition, customization, big data, fraud detection, artificial intelligence, machine learning, and cloud management,” said Hsu. “These activities require expertise and economies of scale that most banks do not have.”

Hsu expressed concern that an increase in complexity with online and mobile payments, lending, and deposit-taking activities is happening similar to what he saw during the 2008 financial crisis.

“Technological advances can offer greater efficiencies to banks and their customers,” said Hsu. “The benefit of those efficiencies, however, are lost if a bank does not have an effective risk management framework, and the effect of substantial deficiencies can be devastating.”

Hsu also said, “Persistent economic inequality can erode trust in banking because those who feel stuck or lack access to traditional financial products and services may conclude that the system is working against them, rather than for them.”

He suggested that consumers could save billions of dollars through “lowering penalty fees for overdrafts, reducing the daily maximum number of overdraft fees that are charged, adding a grace period or buffer amount before fees kick in, or eliminating nonsufficient funds fees or overdraft transfer fees.”

“To effectively safeguard trust in banking, we must maintain high fidelity to the concept of safety and soundness, we must champion fairness, and we need to be agile and credible as we adapt to changing circumstances,” said Hsu.

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