Top Banking Regulator Calls for Caution as Risk Landscape Worsens
The chance of tail risks—unlikely but highly impactful risk events—has increased with the war in Ukraine, said Acting U.S. Comptroller of the Currency Michael Hsu
Banks face a more uncertain environment amid the war in Ukraine and need to shore up their risk management programs to gird against multiple negative scenarios unfolding at once, a top U.S. banking regulator said.
So-called tail risks—unlikely but highly impactful risk events—are a growing potential issue that financial institutions’ risk departments need to grapple with, Michael Hsu, acting comptroller of the currency, said Thursday at a conference hosted by the American Bankers Association.
“Russia’s invasion of Ukraine has affected tail risk as well as geopolitics,” Mr. Hsu said. “Greater caution and risk management vigilance is warranted today, perhaps more than any time in recent memory.”
The recent invasion has increased the risk of a broader conflict emerging, but it also has direct impacts on cyber and inflation risks, Mr. Hsu said.
Banks’ risk managers should update their scenario planning to consider the possibility of multiple tail risks emerging simultaneously and should ensure their stress-testing remains up-to-date, Mr. Hsu said.
He encouraged financial institutions to empower their risk managers to use their judgment, and advised boards and executives to pay attention to those managers’ assessments.
“Strong, independent risk management can help the banking system successfully navigate these risks and avoid surprises,” Mr. Hsu said.
The stress-testing required by the Dodd-Frank Act means large banks should be able to weather many shocks, but they should be wary of complacency and overconfidence, he said.
Apart from the war in Ukraine, growing cryptocurrency trading also poses serious risks, particularly in how institutions account for their crypto holdings, Mr. Hsu said. Supposedly hedged positions have a long history of “blowing up,” he said.
Mr. Hsu said he had engaged in collaboration with U.S. federal authorities and with their U.K. counterparts to maintain a “consistent, careful and cautious” approach to bank involvement in crypto.