The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) proposed new rules on Oct. 7 that seek to focus supervision on material financial risks.
The proposal, among other things, would define the term “unsafe or unsound practice” for purposes of section 8 of the Federal Deposit Insurance Act. It would also revise the supervisory framework for the issuance of matters requiring attention (MRAs) and other supervisory communications.
Establishing a uniform definition for the term “unsafe or unsound practice” for enforcement and supervisory authority would promote greater clarity. It would also ensure that bank supervisors prioritize concerns related to material financial risks over those regarding policies, process, documentation, and other nonfinancial risks.
In addition, the proposed rule would establish uniform standards for when and how the agencies may communicate MRAs and non-binding supervisory observations as part of the examination process. Finally, the proposal would provide for the tailoring of enforcement actions and MRAs.
The Bank Policy Institute said the new proposals strengthen the bank supervisory framework by establishing more effective and rational standards for how examiners define unsafe and unsound practices and employ Matters Requiring Attention.
“Today’s proposed rule should help to refocus the examination process on material financial risks. Furthermore, it seeks public comment on how best to do that — in contrast with a previously opaque process. Thankfully, and to make them truly effective, these proposed reforms will be accompanied by reform of the LFI rating system for holding companies — already proposed by the Federal Reserve Board — and the anticipated revisions to the CAMELS rating system for banks,” Greg Baer, president and CEO of the Bank Policy Institute, said.
The OCC and FDIC also issued a joint notice of proposed rulemaking that would codify the elimination of reputation risk from their supervisory programs.
The proposed rule would define “reputation risk” and prohibit the agencies from criticizing or taking adverse action against an institution on the basis of reputation risk. Further, the proposed rule would prohibit the agencies from requiring, instructing, or encouraging an institution to close customer accounts or take other actions on the basis of a person or entity’s political, social, cultural, or religious views or beliefs, constitutionally protected speech, or solely on the basis of politically disfavored but lawful business activities perceived to present reputation risk.
Additionally, the proposed rulemaking would respond to concerns expressed in Executive Order 14331, Guaranteeing Fair Banking for All Americans. Those concerns are that the use of reputation risk can be a pretext for restricting law-abiding individuals’ and businesses’ access to financial services on the basis of political or religious beliefs or lawful business activities.
The agencies are accepting comments on the proposal for 60 days after the date that the notice was published in the Federal Register.