Acting Comptroller discusses bank liquidity risk

Bank Regulatory OCC Liquidity Risk Management

On January 18, OCC Acting Comptroller of the Currency, Michael J. Hsu, delivered remarks at an event held by Columbia University Law School on bank liquidity risk. Hsu highlighted the evolving nature of bank runs and urged banks and regulators to adapt. While individual bank supervision has seen some adjustments, Hsu stressed the need for targeted regulatory enhancements to ensure the systematic implementation of updated liquidity risk management practices, particularly among midsize and large banks. Hsu’s remarks emphasized three themes:

Recognizing the speed and severity of certain outflows. The liquidity risk for banks with uninsured deposits significantly increased. Hsu said that anticipating potential herding scenarios in liquidity risk management is crucial;

Ensuring the ability to monetize. Hsu said banks and regulators need to adapt to the faster pace of bank runs, where large outflows happen more quickly than in the past. Having enough liquid assets is not sufficient; banks must quickly convert assets into cash, Hsu said. Utilizing the Fed’s discount window is an option, but it faces stigma. Hsu also mentioned that there is a proposal for a targeted regulatory requirement for banks to have enough liquidity to cover short-term outflows, up to five days, using pre-positioned collateral to de-stigmatize discount window usage while preventing over-reliance; and

Limiting guilt by association. To combat the fear that uninsured depositors across banks could be at risk upon bank failures, Hsu said a long-term solution involves distinguishing between operational and non-operational deposits, requiring standardized classification systems and ongoing research efforts to effectively mitigate contagion risks.