- Key insight: The Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. Thursday finalized rules limiting when examiners can raise unsafe practices, or matters requiring attention, to a bank's board of directors.
- Supporting data: The rules allow examiners to flag weaker policies and procedures as supervisory "observations," but generally bar them from requiring corrective action unless the concerns meet the higher standard.
- Forward look: OCC examiners will face new limits on lookbacks, including a general one-year cap for reviews tied to inadequate reporting of suspicious activity.
The Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. Thursday finalized new regulation reining in bank supervisors' ability to flag unsafe practices at banks they supervise.
The new joint final rule — building on a
"It is critical that examiners and institutions prioritize material financial risks over concerns related to policies, process, documentation, and other nonfinancial risks, and that the agencies' enforcement and supervision standards further that prioritization," the joint rule notes. "This definition will focus institution and examiner attention on material financial risks facing an institution and otherwise provide the institution's board of directors and management the flexibility to enact decisions based on their business judgment and risk tolerance."
The final rule marks the first time regulators have
Under the new standard, an unsafe or unsound practice would be one "contrary to generally accepted standards of prudent operation" that, if continued, is likely to materially harm a bank's financial condition or that of the FDIC's Deposit Insurance Fund used to rescue failed banks' depositors. The rule also states that financial harm includes negative impacts to capital, asset quality, earnings, liquidity or sensitivity to market risk.
The agencies said examiners can still flag weaknesses through supervisory "observations," but cannot require corrective action.
"The final rule will encourage institutions to focus on the most important risks to an institution's safety and soundness," the final rule notes. "Examiners may still provide supervisory observations related to weaknesses in policies and procedures, and, in situations where issues related to an institution's policies or procedures would meet the criteria to be deemed an unsafe or unsound practice or merit the issuance of an MRA, the agencies could take enforcement or supervisory action accordingly."
Under the final rule, supervisors retain some flexibility to raise concerns about bankers and other institution-affiliated parties like directors and officers, marking a change from the proposal. Initially, the proposal would have set a higher bar for supervisors to raise concerns against individuals associated with a supervised bank.
The OCC guidance also restricts examiners' ability to conduct "lookbacks" — going back in a bank's data to identify new and previously undiscovered violations. Lookbacks can still be required as part of an MRA when concerns involve harm to consumers or widespread, systematic problems.
"The relevant supervision deputy comptroller for the bank must approve any MRA that includes a lookback (including the use of an independent consultant) in the corrective action," the OCC guidance notes. "The relevant supervision senior deputy comptroller or their delegate must provide their concurrence for a lookback requiring the use of independent consultants or a lookback exceeding one year related to the failure to detect or report suspicious activity in a timely manner."
The OCC also directs examiners to weigh the cost of a review against its benefits and generally limits lookbacks involving failures to detect or report suspicious activity to one year or less.
