When the top regulator of the biggest American banks describes the problems that he regularly encounters with them and announces a process for downsizing or even breaking them up, there is reason for optimism. But there is cause for pessimism, too, since that regulator's agency is historically Wall Street's biggest friend in Washington.
Michael Hsu, the acting comptroller of the currency, has outlined a plan for fixing problems at banks that are what he calls "too big to manage" — the dynamic at work when a bank has reached a size measured in trillions of dollars, but cannot properly safeguard customers from its own illegal activity. Giants including JPMorgan Chase, Bank of America and Citigroup could be forced to sell off business lines or even break up into smaller companies.
Hsu is tentatively headed in the right direction. But he needs to prove that the OCC has the fortitude to see its task through. The OCC's track record simply does not inspire confidence.
This issue screams "Wells Fargo." The bank is scandal-ridden enough to be on late-night comedy shows — even before it was hit with yet another multibillion-dollar fine recently. Laughs aside, Wells Fargo seems unable to stop abusing consumers, whether by opening fake bank accounts in its customers' names or mistakenly foreclosing on their homes or ripping off Black borrowers.
Hsu runs a government agency with a long history of being too friendly with banks.
Before the 2008 financial crisis, the OCC went easy on Wall Street, as subsequent investigations showed. Sheila Bair, a longtime Republican financial regulator called for abolishing the OCC entirely. Tom Curry, tasked with cleaning up the OCC after the crisis, leans the same way. Decades of scholarship demonstrate how the OCC has done Wall Street's bidding.
The megabanks have influence in Washington. Wells Fargo alone spent $16.7 million on campaign contributions and lobbying in the last presidential election cycle, according to data from the watchdog OpenSecrets. In the last five years, the number of lobbyists Wells employs has doubled. And the revolving door still spins for megabanks: a top OCC lawyer just left the agency for the Bank Policy Institute, a lobbying and advocacy organization that counts the country's biggest banks among its members.
Hsu seems a little too enamored of the banks he supervises. In a speech at the Brookings Institution, he opened his remarks by praising them, rather than highlighting the trouble they routinely cause.
Millions of consumers have lost money or their homes at the hands of Wells Fargo. JPMorgan Chase has racked up violations for market manipulation, money laundering and bribery. Citigroup only exists because taxpayers bailed them out in 2008. And the sheer size of these banks lessens competition, to the detriment of consumers and businesses, especially in Black and brown communities.
Notably, Hsu spoke a month after the Consumer Financial Protection Bureau, in December, forced Wells Fargo to cough up another $3.7 billion for illegal fees charged to customers of its auto loans, mortgages, and bank accounts. It wasn't the first time. CFPB fined Wells Fargo in 2016 over its most notorious fraud: opening fake accounts in its customers' names. A group of federal authorities including the CFPB hit the bank with a $3 billion fine in 2020. CFPB Director Rohit Chopra began talking about going beyond fines even before the December fine.
Chopra, an outspoken critic of big banks, took another step after that last fine. He called on other financial regulators to reach for solutions like breaking a bank up into smaller, more manageable parts. "We must forcefully address repeat lawbreakers to alter company behavior and ensure companies realize it is cheaper, and better for their bottom line, to obey the law than to break it," Chopra has said.
Here's a rule of thumb: If experience shows that no management team can make a bank turn a profit without ripping off its own customers, that bank should not exist.
Fines can cripple smaller companies, deterring them from breaking the law, as Chopra has argued. Not so the giant banks, which can all treat sanctions from federal regulators — plus a nasty headline or two — as a cost of doing business. Often, the fines don't even move share prices.
The CFPB is trying to change that calculus, to protect consumers. And it has also made a forceful argument why all the regulators, OCC included, need to think bigger than fines — even to the point of breaking up big banks.
The OCC, however, has a lot of baggage that casts doubt on its ability to act. It needs to prove it can start to solve the enduring, dangerous problem of too-big-to-manage megabanks — not simply diagnose it.
