U.S. Focus – What Will Shape the OCC’s Regulatory Agenda & Priorities in 2022?
How will the current economic, political, and social activism environment in the U.S. and globally impact the regulatory and risk priorities of the Office of the Comptroller of the Currency (“OCC”) in 2022?
The dynamic economic and geo-political environment will continue in 2022.
As various global regions grapple with the effects of the pandemic, economic recovery patterns and trajectories will vary across regions. Add to the brew, the potential risk of inflation or recession, and we see the importance of critical focus on monetary policy and the use of regulatory levers by the U.S. Federal Reserve and other G7 economies.
All this froth impacts banking institutions and their customers. Comprehensive Capital Analysis and Review (“CCAR”) will continue to play an important role in assessing bank risk and risk readiness at the largest institutions (exceeding $10bn). As will Dodd-Frank Act stress testing (“DFAST”), the forward-looking corollary to CCAR. Across other national, regional and community bank entities, CCAR and DFAST are not required, but similar risk focus appropriate to the banks’ capital and operations structures will occur. This is especially true for interest rate risk management, commercial real estate concentrations, and funding and liquidity management.
As of this writing, the Biden Administration has not nominated a replacement candidate to be Comptroller of the Currency following the heated November 2021 Senate confirmation hearing and subsequent December 2021 withdrawal from consideration by Biden’s initial nominee Dr. Saule T. Omarova, currently a professor at Cornell University.
The November hearing highlighted tensions likely to continue in confirming OCC leadership. Omarova has advocated in a recent published article what she calls a “blueprint for a comprehensive series of structural reforms that would radically redefine the role of a central bank as the ultimate public platform for generating, modulating, and allocating financial resources in a democratic economy — the People’s Ledger.”
Regardless of who is ultimately confirmed as Comptroller, Omarova’s nomination has likely sparked debate and may drive action on several topics, including the prospect of central bank digital currency, access to banking and finance, strengthening certain legislation, leveraging limits on unfair practices, and examining risks and opportunities.
OCC 2021 Annual Report
OCC 2021 Annual Report. Acting OCC Comptroller Michael Hsu recently released the OCC’s Annual Report and Comptroller’s Viewpoint. Topics highlighted in the Report and the Comptoller’s Viewpoint include: proactive risk assessment and controls to avoid complacency and overconfidence by banking institutions; increasing access to the banking system and eliminating inequality; supporting Minority Depository Institutions; reducing racial bias in property appraisals; identifying and mitigating risks associated with climate change; Digital Asset Sprints focusing on digitalization and new technologies and products; among others.
Central Bank Digital Currency
I think the OCC, the Federal Reserve and other agencies will probably continue wrestling with central bank digital currency (“CBDC”) - noting that other countries are moving apace. As Omarova’s The People’s Ledger article outlines, a number of questions still require assessment, including whether CBDC will be: (i) limited to financial institutions or made universally available (wholesale vs. retail); (ii) interest-bearing; and (iii) convertible into cash or bank deposits. More generally, it is necessary to assess the relative roles and responsibilities among central banks, banks and payment processors, other fintechs regarding CBDC.
Access to Banking
Congress and the Biden Administration continue to focus on access and equity in banking. Senate Banking Chair Sherrod Brown introduced the “Banking for All Act” in 2020. While the legislation did not move forward, the notion of “digital dollar wallets” likely will continue to be assessed. If adopted in the future, customers could access banking services at regional Federal Reserve Banks and the U.S. Postal Service offices. According to Omarova’s views, OCC regulated banks “would be obligated to offer pass-through digital dollar wallets to individuals via separately capitalized subsidiaries with assets consisting solely of reserve accounts at the Fed.”
Fair Lending/Fair Banking
Acting Comptroller Hsu is focused on assessing and strengthening the Community Reinvestment Act (“CRA”), including by way of joint agency rulemaking. Hsu specifically highlighted OCC’s “Roundtable for Economic Access and Change” (Project REACh). He seeks to leverage “alternative data to help bring those without credit scores into the financial mainstream.” He also is keenly focused on preventing predatory lending. In conjunction with Congress’s repeal of the True Lender rule, Hsu “instructed staff to gather and analyze data on bank-fintech partnerships in order to explore how we can identify and differentiate between harmful rent-a-charter arrangements and healthy partnerships that expand access to credit.”
Comptroller’s Handbook. In terms of consumer compliance, the OCC may begin to leverage Unfair, Deceptive, or Abusive Acts or Practice (“UDAAP”) powers to police potential greenwashing, fair banking, and other claims. The 2020 Comptroller’s Handbook Appendix A offers a variety of content under the heading “UDAP and UDAAP Red Flags.” Importantly, the Appendix clearly states this list is not all inclusive. Leveraging these data trends will help identify emerging risks. In my view, it is critical to analyse all a bank’s operations and practices, including new innovation and ESG practices and statements, through the lens of transparent disclosure and risk management. Examiners will be doing the same.
ESG/Climate Risks & Opportunities
As noted in a companion article Acting Comptroller Hsu also issued “Five Climate Questions Every Bank Board Should Ask” in November 2021. His theme is “turning words into action,” including action plans to assess and mitigate climate risk, assessing variable regional and sector risks, exposure to carbon tax, mitigating data center vulnerabilities, and seizing opportunities stemming from climate change.
The current Biden Administration OCC nominee for Comptroller, if confirmed, is likely to create a seismic shift in the OCC’s priorities. Regardless of who is confirmed as Comptroller, focus priorities in 2022 will include sophisticated risk management, innovation, digitalization and equity access to banking. Institutions should fare well if they (a) set clear and prudent goals for change/growth; (b) make well-reasoned assessment of related risks; and (c) implement robust controls and disclosures
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This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.