ABA Offers Recommendations on Bank Regulators' Proposed Rule on Material Risks

The American Bankers Association ("ABA") offered recommendations to strengthen a proposed rulemaking by the OCC and FDIC to define "unsafe or unsound practices" and revise the supervisory framework for "Matters Requiring Attention" ("MRAs"). (See prior coverage.)

In the comment letter, the ABA supported the agency's proposal to refocus supervision and enforcement on practices and issues that pose material risks to bank safety and soundness. The proposal would provide greater regulatory clarity by formally defining "unsafe or unsound practices," establishing a uniform, materiality-based standard for matters requiring board attention, and would clarify the appropriate use of other supervisory communications and ratings. The ABA offered targeted recommendations to ensure the final rule is applied consistently, grounded in case law, and focused on substantive financial risk rather than technical or immaterial issues.

The ABA recommended that the agencies:

• Refine the definition of "unsafe or unsound practice." The ABA recommended that the final rule require examiners to provide "demonstrable and quantifiable evidence" that material financial harm is likely, ensuring findings are based on objective facts rather than speculative assertions.
• Tie materiality standards to case law. The association argued that the final rule should explicitly reference case law to define harm as material only if it threatens the financial integrity of the institution.
• Revise tailoring expectations. The ABA requested the removal of language suggesting a "higher bar" for finding unsafe practices at community banks, arguing that a true risk-based approach naturally adjusts for an institution's specific risk profile without needing confusing caveats.
• Raise the threshold for MRAs. The letter urged that only "substantive" violations of banking laws—defined as systemic or recurring errors—should trigger an MRA, ensuring that technical, isolated, or immaterial infractions do not result in formal supervisory citations.
• Codify limits on informal communications. The ABA requested that the rule expressly state that institutions are not required to track or report informal "supervisory observations" to their boards and cannot be penalized for deciding not to act on non-binding suggestions.
• Address legacy and self-identified issues. The ABA recommended excluding self-identified issues with remediation plans from becoming MRAs and called for a one-time retrospective review to close legacy MRAs that do not meet the new material risk standard.