FDIC launches supervisory appeals panel

• Key insight: Banks can now appeal material supervisory determinations that undergird a potential enforcement action by raising the issue with the new Office of Supervisory Appeals
• Expert quote: "The Office will make independent supervisory determinations without deferring to the judgments of either party, subject to the reasonableness of and the support for the positions advanced." — Statement from the Federal Deposit Insurance Corp. 
• Forward look: The agency is also working through finalizing revisions to the CAMELS ratings system used to grade bank supervisory soundness, with the comment period open until mid August.

The Federal Deposit Insurance Corp. on Tuesday announced the launch of its new Office of Supervisory Appeals, replacing what was previously a Supervision Appeals Review Committee as the final level of review for banks challenging certain FDIC supervisory decisions. 

The FDIC announced the new Office of Supervisory Appeals in revised guidelines approved by the FDIC Board in January, a move that was designed to provide a more independent review process for banks challenging supervisory decisions. The presence of the board will give banks a new tool to push back on supervisory determinations, potentially allowing more of those determinations to be revised in banks' favor.

The office will operate separately from the FDIC divisions that make supervisory determinations and appeals will be reviewed by panelists with both regulatory and industry experience.

"Reviewing officials are subject to confidentiality and conflict of interest requirements," the FDIC stated in a release. "The Office will make independent supervisory determinations without deferring to the judgments of either party, subject to the reasonableness of and the support for the positions advanced."

Under the new framework, banks enjoy expanded appeal rights, allowing institutions in certain cases to challenge supervisory determinations when an enforcement action is proposed or pending.

The FDIC also announced the names of the three officials it has selected to serve on the panel: Tim Ayala, John Conneely and Duke Sheow.

Ayala was formerly the executive vice president and chief risk officer at the $54-billion-of-assets Pinnacle Financial Partners, and also worked as an FDIC-commissioned bank examiner. Conneely served at the FDIC for nearly 35 years until 2023, according to his Linkedin, including serving as director of the Division of Complex Institutions Supervision & Resolution, the agency's Chicago regional director. Sheow is a former FDIC bank examiner and banker who most recently was a managing director at PriceWaterhouseCoopers. 

The FDIC in January issued a final rule revising its supervisory appeals process, incorporating commenters' requests requiring a former banker on the supervisory appeals panel and expanding banks' ability to appeal findings that contribute to enforcement-related cases. Under the original proposal, which the agency submitted for comment last July, appeals of supervisory determinations would be reviewed by an independent three-member panel of non-FDIC employees.

The new process also allows appeals in certain cases where an enforcement action is proposed or pending.

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Going forward, when the FDIC issues an enforcement action based on material supervisory determinations, the institution will now be able to appeal those determinations. Those appeals are limited to supervisory determinations that do not involve unsafe or unsound practices under Section 8 of the Federal Deposit Insurance Act or violations of laws or regulations related to anti-money laundering or sanctions evasion.

The Office of Supervisory Appeals is designed as a distinct unit within the FDIC and will be staffed by experienced agency officials serving fixed terms reporting directly to the chair. The board would give it authority to review and decide appeals.

FDIC board member and Comptroller of the Currency Jonathan Gould, who supported the proposal, has said his agency the OCC would be issuing a similar proposed rule in the near future. 

The moves come as the FDIC under the Trump administration has moved to narrow bank supervision by focusing supervisory exams more on what they deem "material" safety risks and less on exhaustive procedural exercises.

Regulators also proposed revising the supervisory ratings framework earlier this year in May, the first such overhaul in three decades, a move bank trade groups requested in August after the Federal Reserve System revised a similar rating system used for large banks. That proposal remains open for comment through August 17.