Banking Regulators Propose Rule to Refocus Supervision on Material Risks

The Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC") issued a proposed rulemaking to revise the supervisory framework by defining the term "unsafe or unsound practice" and establishing a uniform standard for "Matters Requiring Board Attention" ("MRBAs").

The proposed rulemaking would: 

1. Formally define "unsafe or unsound practice." The proposed rule would formally define an "unsafe or unsound practice" as a practice, act, or failure to act that (i) is "contrary to generally accepted standards of prudent operation" and (ii) either is likely to "materially harm the financial condition of the institution" or the Deposit Insurance Fund or has already done so.
2. Establish a uniform standard for MRBAs. Under the proposed rule, an MRBA could be issued only when a practice (i) is contrary to prudent standards and could reasonably be expected to materially harm the institution or the DIF, or (ii) constitutes an actual violation of a banking law or regulation. The proposal clarifies that MRAs would not be issued for potential violations or minor policy or procedural deficiencies unless they independently meet the financial risk threshold.
3. Clarify other supervisory communications and ratings. The regulators added that examiners may continue to issue non-binding "supervisory observations" for suggested enhancements, but institutions would not be required to act on them, and they could not form the basis for an MRBA. The regulators also stated that a downgrade to a "less-than-satisfactory" composite rating would occur only if an institution receives an MRBA under the new standard or is subject to an enforcement action.