Since taking on the role in November 2017, Comptroller of the Currency Joseph Otting has been relatively circumspect regarding his views on the banking industry, bank regulation, and bank regulatory reform. In testimony on June 14 before the Senate Committee on Banking, Housing, and Urban Affairs, Comptroller Otting provided the clearest insight to date about his views on the federal banking system and the role of bank regulation.

In his testimony, Comptroller Otting first discussed risk in the banking system and the OCC’s “supervision by risk” approach, noting the following areas of heightened risk:

  • Elevated credit risk due to eased credit underwriting, increased commercial real estate concentration limits, and policy exceptions that create a higher level of concern
  • Elevated operational risk created by cybersecurity threats and third-party relationships, including risks created by consolidation in the fintech industry, which has led to a limited number of providers servicing large segments of the banking industry
  • Elevated compliance risk due to Bank Secrecy Act (BSA) requirements, the new FinCEN beneficial ownership rules, and new technologies that attempt to increase customer convenience and access to financial products and services, and the need for banks to better manage implementation of regulatory changes in consumer laws

Comptroller Otting also outlined his regulatory priorities, which include the following:

  • Updating the Community Reinvestment Act (CRA) regulations, including broadening the list of activities that qualify for CRA consideration and revising the concept of assessment areas, to “better serve [the CRA’s] origination purpose and encourage more investment and banking activity supporting the people and communities needing it most”
  • Encouraging banks to meet consumer short-term, small-dollar credit needs as an alternative to payday lending and other high-cost loans that often launch a cycle of debt that consumers cannot exit (in his remarks, Comptroller Otting specifically referred to the OCC’s recent guidance on short-term small-dollar lending)
  • Enhancing BSA/anti–money laundering (AML) compliance to be “more efficient while improving the ability of the federal banking system and law enforcement to safeguard the nation’s finance system from criminals and terrorists,” including possibly changing the Suspicious Activity Report thresholds and allowing for BSA/AML exams to be scheduled and scoped on a risk basis
  • Simplifying regulatory capital and the Volcker Rule (Comptroller Otting noted that this process has been initiated through proposed rules in both areas)

Takeaways

These priorities present an ambitious list of reforms, some of which (e.g., changes to BSA reporting thresholds) may require legislative changes that could be challenging to achieve in the current Congress. Others, such as changes to regulatory capital and the Volcker Rule, we view as reasonably likely to occur in the near- to mid-term. Still other changes, such as small-dollar short-term lending by banks, leave us asking how high-risk loan products intended to serve the unbanked and underbanked can be harmonized with a risk-based supervisory environment.