How a more hands-on OCC chief could change bank supervision

WASHINGTON — The interim chief of the Office of the Comptroller of the Currency is not only unwinding rules from the Trump era, but is also restoring an organization structure meant to put him more in the driver's seat on bank supervision.

Earlier this month, acting Comptroller Michael Hsu said the agency’s major bank supervision divisions willreport directly to his office, rather than through a chief operating officer. The agency's COO position is being eliminated.

The change is somewhat a return to normal for the OCC, which until the Trump administration never had a COO. The position was created by former Comptroller Joseph Otting, a former banking executive who sought to run the OCC like a business bycutting the agency’s costs anddelegating some authority to lieutenants, including over bank supervision.

Many observers say restoring a more top-down management structure for how the OCC supervises banks is notable for an agency sometimes criticized for being too cozy with the industry.

"It’s very important to take that fresh set of eyes and ask, whether it’s organizing offices or reporting lines, ‘Are there structural changes that can be made to the agency that will help it better achieve its statutory missions?’ Because I think over the years, it has fallen short,” said Gregg Gelzinis, an associate director for economic policy at the Center for American Progress.

The agency's organizational realignment as well as Hsu's rescinding Otting's rule reforming the Community Reinvestment Act are signs that the acting comptroller may be in the job for awhile and will not just be a caretaker.

Blake Paulson, the prior COO who was formerly acting comptroller in final days of the Trump administration, will be given a new role as senior deputy comptroller for supervision risk and analysis. That position will oversee two units: Systemic Risk Identification Support and Specialty Supervision, and Supervision System and Analytical Support.

Four other supervision-related divisions as well as the Office of Management, which had all previously reported to Paulson, will report to Hsu. The OCC will also merge its Enterprise Risk Management Office with the Office of Enterprise Governance.

Some analysts say the changes are not surprising given Hsu's experience at the Federal Reserve, where he led large-bank supervision.

“I’ve always viewed people who understand financial services and understand financial regulation as probably leaning towards a more lean executive corporate governance structure in an agency, because they just don’t need it," said Thomas Vartanian, a former regulator and author of “200 Years of American Financial Panics: Crashes, Recessions, Depressions, And The Technology That Will Change It All.”

And former OCC employees say that the reorganization really shouldn’t be seen as much of a sea change. The comptroller of the currency has always had broad, unilateral power over the agency’s decision-making process.

“Everybody ultimately reports up to the comptroller. That was the case prior, when there was a chief operating officer, and it will be the case under this new realignment,” said Karen Solomon, senior counsel at Covington and former chief counsel to the OCC. “The difference is really in terms of administrative detail.”

But other analysts say the potential significance of the reorganization shouldn’t be overlooked, either. Any changes made to the OCC’s supervisory approach could be felt by banks quickly, especially if they come directly from Hsu.

"Supervision really is an ongoing dialogue with the regulated entities. It’s not as black-and-white and clear-lined as regulation is," said Gelzinis. “It really is an ongoing, more flexible process, and that means the direction really set out from the top of the organization might have an even larger impact on the stance that supervisors are taking day to day with the regulated institutions.”

That will matter all the more for national banks if Hsu finds himself in the role for the foreseeable future. To date, the Biden administration has made no mention of a Senate nominee to take on the role for a full five-year term.

“There are always tea leaves that people read about who's going to be running the agency, how they’re going to be running it, and so on. And sometimes, those tea leaves turn out to be right, and very often, they turn out to be wrong,” Vartanian said. “But I would saythe appointment of a chief counsel and the restructuring of the agency are a strong signal that [Hsu] and the chief counsel could be there permanently.”

In announcing the reorganization, the OCC said the changes were designed “to enhance the agency’s efficiency and effectiveness.” Former employees who served before Otting created the COO role say that the OCC’s historically slimmer executive office was often a boon for the agency’s top-level decision making.

But some OCC alumni also said much of the agency’s core operations tend to chug along with little direct input from the comptroller. Dan Stipano, a partner at Davis Polk and 30-year veteran of the OCC, said it wasn’t uncommon for the agency’s politically appointed leaders to feel “somewhat disconnected from the day-to-day work of the agency.”

“To a certain extent, that is a good thing,” Stipano said. “But it’s also important for someone in Mr. Hsu’s position to be able to effectively oversee the bank supervision function, and be comfortable with the decisions that are being made in major supervisory and enforcement matters.”

Hsu “may have reviewed the existing structure and thought it included an unnecessary buffer between himself and the senior staff in bank supervision,” Stipano said.

Others said that Hsu’s changes could even help facilitate better coordination not just within the agency, but with the other prudential regulators as well, defusing some of the polarization and conflict that characterized regulatory affairs under the Trump administration.

“It's an alignment that probably is going to result in better coordinated support for the OCC’s supervision activities,” Solomon said, pointing to recent interagency guidance on third-party relationships as an example. “I don't think these structural changes are working in the direction of polarization — I think they're going, actually, the other way.”

A more hands-on approach to OCC affairs from Hsu could also give the acting comptroller a better ability to respond to one of the political left’s longest-running criticisms of the national bank regulator: that too often the OCC has been more deferential to the business interests of banks compared to other regulators.

“Structural changes like this one are going to be important. The OCC has long been an agency that has suffered from some industry capture, and has too often not really been rigorous when it comes to supervision, examination and enforcement,” Gelzinis said.

Consumer groups and other left-leaning advocates for financial reform have frequently accused the OCC of complacency in the years leading up to 2008, when the regulator fought state authorities over the rights of national banks to expand the market for mortgage-backed securities, which later fueled a financial crisis.

“It’s not like this was acting Comptroller Hsu making structural changes to an agency with a flawless track record here,” Gelzinis said.

The OCC declined to comment for this story.

But some in the industry remain concerned about just how far Hsu — or his theoretical Senate-confirmed successor — may steer the OCC to the left on matters such as climate change, whether or not Hsu has more direct oversight of the agency today than when he started.

“I don't think the reorganization itself is the cause of the worry — I think it's more of the public statements that he's been making,” said one banking lawyer who often works with the OCC. “[Hsu’s] talking about climate change being a big focus, and that’s a very controversial thing in the bank regulatory world, because climate change has never been a historical priority for bank regulation.”

Given the comptroller’s already significant power over the agency, some observers also questioned the real need for the change in the first place.

Some industry observers speculated that the change could have been motivated in part by Hsu wanting Paulson to have less power over the agency’s day-to-day affairs. Paulson rankled some on Capitol Hill in April when he asked congressional Democrats not to throw out a regulation known as the “true lender” rule via the Congressional Review Act.

“Paulson reported to the comptroller, so the comptroller could still effectively overrule anything that he was doing or direct him to do other things,” the lawyer said, speaking on the condition of anonymity. “But the reorganization certainly takes him out of the way, in part.”

There’s also the matter of Hsu and OCC chief counsel Benjamin McDonough’s prior experience as regulators at the Federal Reserve. Some in the regulatory sphere have expressed concern about the growing influence of former Fed employees across the Treasury Department, including at the top of the OCC.

“Those agencies have had traditionally different cultures, and I think to the benefit of everybody in the banking business,” said Vartanian. “I think there is probably some concern that with Fed people coming over to run the OCC, those cultures may be merged, and the benefits of those diverse cultures lost.”