Bank trade groups are divided over a proposal from the Office of the Comptroller of the Currency that would subject fewer lenders to heightened supervisory standards, with smaller banks warning the change could put the broader industry at risk.
In late December, the OCC issued a proposed rule that would increase the asset threshold for heightened standards guidelines, from $50 billion to $700 billion. The move would shrink the pool of banks subject to those standards from 38 to eight, the agency estimated.
Large banks would rather the OCC do away with the 2008 financial crisis-era guidelines entirely, while community banks called the jump to $700 billion “unprecedented” and pushed instead for a $100 billion threshold.
Heightened standards, designed to enhance the OCC’s supervision and strengthen governance and risk management practices of large banks, were adopted after the 2007-08 Great Financial Crisis and formalized in 2014, the agency said in its notice of proposed rulemaking.
Since that time, the OCC has observed “the burdens and benefits” of the guidelines on applicable banks. The guidelines’ “extreme prescriptiveness” and the accompanying burden necessitates a higher threshold, so the guidelines apply to just the largest and most complex banks, the agency said.
That would allow banks under $700 billion in assets “to design and implement a risk governance framework that is best suited to their banking organization,” the OCC said.
The move is aimed at reducing the regulatory burden for midsize banks, while allowing the OCC to reallocate supervisory resources to bigger banks, the agency said. The OCC would retain the authority to apply heightened standards guidelines to banks below $700 billion in assets if their operations are highly complex or pose more risk.
Comments were due Monday – and the proposal garnered 19 of them, many from industry trade groups and a few from banks themselves.
The American Bankers Association, Consumer Bankers Association, Bank Policy Institute, American Association of Bank Directors, Financial Services Forum and Mid-Size Bank Coalition of America all support the proposal, saying the guidelines are overly prescriptive and duplicative given other regulations to which banks are subject.
Most trade groups want the OCC to rescind the heightened standards entirely, or at least replace them with nonbinding, principles-based supervisory guidance.
The guidelines “are inappropriate for a bank of any size because they prioritize documentation and process adherence over genuine risk identification and mitigation,” wrote the Financial Services Forum, which represents the eight largest U.S. banks. “They are a clear example of how ‘procedural box-checking’ deters innovation, distracts from strategic thinking at both the board and management levels, and imposes undue burdens, costs and inefficiencies.”
The OCC’s refocus of supervision toward material financial risks “compels the conclusion” that the guidelines ought to be rescinded entirely, the trade group contended.
The Independent Community Bankers of America, however, took a different stance than peer trade groups representing bigger banks. The ICBA called the increase to $700 billion “far too high” and going “far beyond what is appropriate or safe given recent supervisory experience.”
“Weakening or removing these standards for large institutions in the $100 [billion to] $700 billion range would ignore recent evidence, diminish supervisory expectations, and heighten the probability and severity of future large-bank distress,” Lance Noggle, senior vice president of operational risk and senior regulatory counsel at the ICBA, wrote in a comment.
The trade group instead suggested $100 billion as the new threshold. So did the Community Bankers Association of Illinois, in its comment letter.
The ICBA pointed to TD’s anti-money laundering fiasco, noting the $400 billion-asset lender’s situation “underscore[s] the continued importance of enhanced governance and risk management expectations” for banks in the $100 billion to $700 billion asset range.
An increase to $700 billion would “eliminate formalized governance expectations precisely for the cohort where supervisory findings indicate persistent control and risk management challenges,” Noggle wrote.
Patrick Haggerty, a partner at financial services advisory and investing firm Klaros Group, said it’s not surprising to see smaller bank trade groups push for more tailored changes.
“Banks subject to the heightened standards rule have long felt the guidelines were overly rigid, focused on process over effectiveness, and in conflict with ‘enhanced prudential standards’ for large bank holding companies mandated by the Dodd Frank Act,” he said in an email. “In contrast, community banks and other small institutions worry that they will face the brunt of any economic and regulatory fallout if large banks fail to adequately control risk.”
Advocates on both sides of the issue invoked Silicon Valley Bank and other regional bank failures of 2023.
Heightened standards guidelines have caused examiners “to lose sight of the true risks that banks face” which “may lead to more failures like Silicon Valley Bank,” wrote George Buchanan and Colleen McCullum, who support the proposal. Buchanan and McCullum are the chief risk officer and chief audit executive, respectively, at $87.5 billion-asset Flagstar Bank.
The guidelines “unnecessarily layer multiple levels of governance, management, and policies and procedures with little or no benefit to safety and soundness but at tremendous cost,” the Flagstar executives wrote. The standards have “also been particularly vulnerable to regulatory drift, with expectations increasing every exam.”
The Woodstock Institute, a fair lending and financial reform-focused nonprofit, also mentioned SVB, but expressed the opposite sentiment toward the proposal, which the group called “alarming” and said “runs into a familiar pitfall … of assuming that size equals complexity and systemic importance.”
The nonprofit pointed to SVB as an example of a more complex bank that would not meet the $700 billion threshold.
“What this proposed rule describes as overly prescriptive requirements in the existing rule are in fact an appropriate floor for risk assessment and management,” the group wrote. “A change this drastic would be concerning under normal circumstances, but it is even more so in the current context of broad-scale deregulation of the financial system.”
Nonprofit Better Markets called the proposal “arbitrary and capricious,” asserting the OCC offered no evidence to support the proposed increase and should, at the very least, reissue a proposal with “thoughtful analysis” on a reasonable threshold.
Haggerty noted that the core principles within the OCC guidelines – three lines of defense, risk assessments and more active board oversight of risk – have become standard even for banks that aren’t subject to the OCC rule. He said he doesn't expect those practices to disappear.
“The question is more about whether the OCC needs a prescriptive and enforceable rule, or if it should allow for greater experimentation and institution-specific tailoring for risk governance frameworks,” he said.
