June 1, 2024 / VOLUME NO. 316

Avoiding "Too Little Too Late"

Amid debates around capital, liquidity and bank failures, Comptroller of the Currency Michael Hsu wants more banks to focus on recovery planning — or as the Comptroller’s Handbook puts it, having a detailed, actionable framework to restore the bank’s “financial strength and viability” and avoid failure in response to severe stress.

“Recovery planning tends to be overshadowed by resolution planning,” Hsu said in prepared remarks for an event at Vanderbilt University Law School recently. “Practitioners of bank crises know, however, that strong recovery plans can and do make a critical difference when a large bank is under severe stress.”

The OCC’s recovery planning guidelines apply to institutions over $250 billion in assets; Hsu announced that he would like to expand that application to banks over $100 billion, though the OCC hasn’t indicated any specific proposals. He connected the lack of such planning to the failures of Silicon Valley Bank and Signature Bank after historic deposit runs. 

Those banks were also unable to access funding from the Federal Reserve’s discount window before they were closed. That may not have prevented those failures, said Hsu, but “at a minimum, such planning would have made their resolutions more orderly and less costly to the Deposit Insurance Fund.”  

While the OCC’s recovery planning guidelines are extensive, Hsu focused on three specific elements in his speech: triggers that indicate a severe stress event, such as changes to the bank’s capital or liquidity ratios; recovery options, such as balance sheet restructuring; and impact assessments, which describe how the recovery plan would affect the bank.  

More banks need to understand what events should spur a response, how they would react in various situations and what the consequences of those actions would be. While Hsu is concerned with the nation’s largest banks, these are all decisions that boards and management teams must be prepared to make — even those well below $100 billion in assets.

“Banks in stress tend to do too little too late,” said Hsu, “as the sense of urgency needed to compel recovery action often sets in only after the window for taking such action has closed.” 

• Emily McCormick, vice president of editorial & research for Bank Director

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