WASHINGTON — Acting Comptroller of the Currency Michael Hsu Wednesday called for the Financial Stability Oversight Council to establish a "tripwire approach" to the designation of systemically important nonbanks, whereby certain metrics would automatically advance a firm to active consideration for designation if met.
"The tripwires could complement other modes of analysis and would not have to be the exclusive means of prompting an assessment," he said. "Notably, the only consequence of crossing a tripwire would be to move from the identification phase to the assessment phase of the analytic framework [and] each assessment would then be conducted on its own merits, irrespective of the tripwire, which would inform the need for an FSOC response (if any), ranging from interagency coordination and information-sharing to initiating the process to consider a designation."
Hsu said the body would pursue such a regime through the regular notice-and-comment process. He also said a "tripwire" — which triggers the assessment of systemic risk when a company exceeds a set of standardized metrics and thresholds worked out by the FSOC — could be complemented by a scalar for fund structures and affiliated insurance activities.
"Closed-end funds with long lock-up periods would have a lower scalar than innovative, non-closed-end fund structures, such as evergreen funds," he said. "Private credit funds with no links or affiliations with [private equity]-influenced insurers or reinsurers would have a lower scalar than those with links and affiliations."
FSOC — of which Hsu and other agency heads are members — recently issued a
According to Hsu, one particular category of nonbank — private equity firms — merits greater scrutiny. He argued PE firm models have evolved in ways that increasingly blur the lines between banking and commerce.
As highlighted by Hsu, PE firms historically raised investor funds to invest in illiquid shares of private sector entities, but that's changing. In addition to the growth of
"These structures, however, can introduce new risks, including redemption risks similar to those faced by open-end bond funds, which have been cited as a financial stability concern by the FSOC and the [Securities and Exchange Commission]," he said.
In his remarks, Hsu also voiced concern about the expanding role of nonbank fintechs in payments. He argued that while the rise of peer-to-peer payment apps and point-of-sale terminals in retail locations demonstrates companies leveraging technology to innovate and compete, it also brings risks as these companies venture into more comprehensive business models.
"Companies that started off simply facilitating payments now offer customers the ability to deposit paychecks directly into their accounts, earn yield on the cash held there and access credit, all with a few clicks of a mouse or taps on a phone," he noted. "Any entity managing money on behalf of customers can face a run if those customers have doubts about the safety of their money."
Hsu likened the emergence of payment apps to that of brokerage firms, which initially concentrated on trading but later expanded into additional services like
"Rather than contort bank charters and blur banking and commerce (à la 1929), a better solution would be for Congress to create a federal framework for payments regulation, as recommended by the U.S. Treasury in its report on the future of finance," he argued. "Doing so would provide a clearer path for innovation and growth in payments with less risk of blurring and to financial stability."
Hsu also noted the Glass-Steagall Act's ban on nonbank deposit-taking — enforced by the Department of Justice — is another tool federal officials could theoretically use to rein in imitation banks. Yet, he noted, the law is not commonly utilized as a primary tool for regulating emergent deposit-like financial products. Notably, banking academics argue the Department of Justice
Hsu mentioned that while today's focus mainly discussed the risks associated with PE and payments, he sees similar concern in the mortgage and hedge fund markets — a stance that Federal Deposit Insurance Corp. Chair Gruenberg
"I believe the risk of a great blurring taking place over the next decade is greatest in payments and in private credit/equity [however,] other areas, such as mortgage servicing and hedge funds, may warrant similar, or even more urgent, attention," Hsu said.
