MVA White Collar Defense, Investigations, and Regulatory Advice Blog

The Clearing House conference was insightful as always.  Here are our main takeaways. 

Preemption remains alive and well-at least at the OCC. Comptroller Gould provided another full-throated defense of preemption for national banks. The OCC plans to fully support national bank preemption in a variety of formats, including amicus briefs, consulting with the Solicitor General, and engaging with members of Congress and the public. The Comptroller made clear he expected banks to engage in similar activity and to bring litigation in support of national bank preemption. Further, he noted the importance of preemption to state banks under Riegle-Neal Interstate Banking and Branching Efficiency Act, which Comptroller Gould believes is overlooked in the current environment.

The Comptroller also expressed concern regarding the limited political interest in or support for preemption, which could result in a weakening of legal preemption protection. Perhaps in line with this concern, he explained the OCC is considering how preemption may be relevant to the rollout of AI, analogizing to the importance of preemption to the development of nationwide credit markets.

In line with our recent blog post, the Comptroller’s interviewer, Rodgin Cohen, referred to the Supreme Court's Cantero decision as a Rorschach test. Cantero has generated serious uncertainty regarding the applicability of preemption.  And the uncertainty has not been resolved by the decisions from the First and Ninth Circuits.

OCC Priorities are Changing. Comptroller Gould highlighted agency management and ensuring the continued relevance of the federal banking system as his two main priorities. His focus on banking system relevance includes focusing regulation on safety and soundness and addressing areas that go beyond that mandate.  In that regard, he emphasized that reputational risk is no longer a targeted risk by the OCC.

Going forward the Comptroller said that areas which the OCC planned to address include recovery planning, heightened standards, and community banking. In a later panel, another OCC representative previewed that the OCC is focused on guidance documents that have not gone through Administrative Procedures Act processes, including around heightened standards, model risk management, leveraged lending, and third-party risk management. There was also discussion from the Federal Reserve representatives of modifying or eliminating the regulatory practice of horizontal reviews and using them only to provide institutions with best practices.

Debanking inquiries require focused attention. Comptroller Gould is also very focused on the debanking inquiry, including its relation to BSA/AML, and we should expect that inquiry to continue to keep some of us up at night.  The OCC is looking through its customer complaints and those of third parties and, as previewed in bulletins issued in September, using the licensing and CRA process to bring allegations of debanking to light. Comptroller Gould indicated the OCC is working with Treasury and FinCEN on broad-based BSA/AML reform, and the OCC is focusing in particular on its BSA/AML exam procedures.

In our view, many industry players are dealing with the debanking inquiries, but those inquiries are not all equal. While some institutions view the inquiries as routine and as something that will not result in much more than additional documentation, other organizations clearly view it as an inquiry with real potential for enforcement. The OCC’s comments suggest the latter view is warranted for some.

Stablecoins are here to stay.  Approaches to stablecoins after the Genius Act remain diverse. Some institutions appear ready to jump into stablecoin issuance while most others are looking at ways to custody the assets and offer products to customers, including white labeling. Digital currency firms see the asset class taking significantly from deposits but that sentiment was not shared by banks. The primary use cases referenced were for trade settlement, cross-border payments, and business-to-business transactions. Panelists did not foresee widespread adoption of stablecoins in the U.S. in the near term for consumer payments given relatively cheap and attractive alternatives like credit cards. Comptroller Gould said that if this transition were to happen in the U.S. it would likely be gradual and potential action would be considered. Tensions between stablecoin advocates and banks continue, including, for example, over the issue of rewards and other payments for stablecoins. 

AI was a major star of the conference as it has been all year. There was in interest in the possibilities, but the panelists acknowledged that the expense of the technology is driving consolidation and increased share value for the largest institutions.  While there is a lot of discussion of its potential, the primary applications mentioned were coding, addressing potential threat actors, and detecting misconduct. 

Private capital was not a major point of interest. There were repeated references to traditional banking activities, such as mortgage origination, moving outside the regulatory perimeter. The final panel of the conference addressed private credit, with panelists largely focusing on partnerships between banks and private credit. These were touted as having benefits to banks in allowing them to meet the needs of their customers, generate fee income, and manage capital and liquidity. Some of these benefits may be impacted by anticipated changes to the capital rules. The topic of retail investors being permitted to invest in private credit was raised but did not generate much discussion.

M&A was another significant focus of the conference. In a panel of industry experts at the beginning of the conference, one panelist described pent-up M&A activity and predicted there would be three years ahead of a 25-30% increase in M&A. The environment was described as one in which banks may be buyers and sellers at the same time, but there is a shortage of sellers as compared to buyers. Comptroller Gould also addressed bank consolidation briefly, noting he believed it was beneficial for financial stability, and the OCC does not view it with skepticism.

Bank leaders are positive about the future. The banking CEOs sounded a positive tone about the state of the market and the American consumer.  They also noted that markets have seen a very long positive run, and may even be a bit frothy, which may reverse or at least moderate soon. Importantly they did not see the issues with private credit becoming a tipping point. All noted a regulatory shift to focusing on requirements that improve safety and soundness and actively removing hurdles that did not materially improve that mission.  

Finally, the most surprisingly insightful presentation for me was by Eli Manning. He offered excellent stories of how leaders get the most out of their teams.  He focuses on understanding what each of his team member needs in a given situation to perform their best.  He also trusts his teammates when it matters most if he knows they have put in the work.