Dive Brief:

• The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. issued a final rule Thursday that formally defines “unsafe or unsound practice” and establishes uniform standards for when and how to issue matters requiring attention.
• The rule was first proposed last October and drew about 36 comments. The finalized rule is intended to maintain agencies’ supervisory and enforcement focus on “practices, acts, or failures to act, that, if continued, would be likely to materially harm the institution’s financial condition or present a material risk of loss to the Deposit Insurance Fund.”
• The agencies said the move furthers their effort to focus regulators’ and banks’ attention on material financial risks, rather than nonfinancial and other risks regarding policies, process and documentation.

Dive Insight:

The FDIC and OCC said the changes would provide greater clarity and certainty for banks.

The final rule “shifts the nature of supervisory criticisms” by directing regulators’ attention to underlying fundamental risks, instead of banks’ processes for managing risks, FDIC Chair Travis Hill said in a Thursday statement. And it imposes a materiality threshold for evaluating potential risks, he said. 

“In combination, the result is that examiners will focus only on issues that can have a material impact on the financial condition of an institution and on actual violations of relevant laws or regulations,” Hill said.

Examiners aren’t prevented from proactively identifying issues due to the final rule, and don’t need to wait for financial harm to occur to issue a supervisory criticism, Hill noted.

But “the risk that a practice or act would materially harm the financial condition of the institution must be ‘more than speculative or merely possible,’” Hill said.  

As a result of the shift, Hill said the FDIC is closing or has closed “a large majority of outstanding supervisory criticisms” that don’t meet new standards; meanwhile, “many” do meet new standards and will be converted to MRAs, he said.

Also Thursday, the OCC “substantially revised” its policies and procedures manuals related to enforcement actions and MRAs, to emphasize material financial risks. 

Those changes were aimed at underscoring principles that should guide enforcement action considerations: “escalation, tailoring and focusing corrective actions on those essential to address specific deficiencies,” the agency said Thursday. 

Changes made “ensure enforcement tools are used proportionately and predictably,” and reflect the increased regulatory and supervisory expectations for large or complex banks, the OCC said. 

The moves “codify” the OCC’s “return to risk-based supervision, helping to ensure that its more reasonable, intentional approach to bank supervision endures,” Comptroller of the Currency Jonathan Gould said in a statement. “It is critical that examiners and institutions prioritize material financial risks and substantive violations of law over concerns related to policies, process, documentation, and other nonfinancial risks, and that the agencies’ supervision and enforcement standards further that prioritization.” 

The OCC also issued a proposed rule intended to “further refine the standard” for MRA issuance for legal violations, establishing and defining “substantive violations” and “technical violations” as two distinct categories.  

Rob Nichols, the CEO of the American Bankers Association, said the final rule regarding unsafe or unsound practices and MRAs “will bring needed certainty to bank examination and supervision while ensuring that attention is rightly focused on material financial risks.”  

“Today’s actions, along with recent steps the agencies have taken to improve supervision, will bolster the safety and soundness of banks of all sizes and help them better serve their customers, clients and communities by providing more consistency and predictability,” Nichols said in the statement. 

Critics, though, warned that the proposal would limit regulators’ ability to take action against banks taking excessive risks. 

In February, Sen. Elizabeth Warren of Massachusetts and four other Democratic senators urged the FDIC and OCC to withdraw the proposed rule, saying it would “disarm examiners” and “silence supervisors, who are able to identify and communicate risks to banks early — before they fester and become much bigger problems.” 

In a Thursday LinkedIn post, Jeremy Kress, an associate professor of business law at the University of Michigan, said the rule “exceeds the OCC’s/FDIC’s statutory authority, conflicts with established judicial precedent, and undermines effective supervision,” and “should be rescinded expeditiously by the next administration.”