Senate Democrats Urge Banking Regulators to Withdraw Bank Supervision Rule
Commentary by Steven Lofchie
Senate Democrats urged Comptroller of the Currency Jonathan Gould and FDIC Chair Travis Hill to withdraw a proposed rule that would redefine "unsafe or unsound" practices in the banking sector.
The proposed rule would, in part, 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. (See prior coverage.)
In the letter, Senators Elizabeth Warren, Jack Reed, and others argued that the proposal would severely hamper the ability of examiners to identify and address risks before they become catastrophic. They contended that the new definition—which would require harm to be "likely" and "material"—would force supervisors to adopt a "wait until something breaks" approach. The lawmakers warned that the rule would "shield banks from accountability, fuel hazardous risk-taking on Wall Street, and leave consumers and businesses more exposed to the economic pain inflicted by bank failures."
The Senators characterized the proposal as inconsistent with the "plain meaning of the law," noting that Congress intentionally omitted qualifiers regarding likelihood and materiality from the statutory definition of "unsafe or unsound" practices. The group asserted that unilaterally adding these conditions renders specific statutory clauses redundant and ties examiners' hands with "bureaucratic or other hurdles." Highlighting the 2023 bank failures, they observed that previous crises were exacerbated by "slow, bureaucratic, and ineffective supervision" rather than over-aggressive enforcement, arguing that the new rule would only accelerate such failures.
The Senators requested that the agencies immediately withdraw the proposed rule to ensure examiners retain the ability to remediate risks before they threaten the financial system.
Commentary
If the proposed change is adopted, and a bank fails, for any reason whatsoever, commenters would surely say, "I told you so. The bank would not have failed but for the relaxation of standards."
That said, if a risk is not "material," there is a good argument that it should not be deemed unsafe. If a risk is material, even if unlikely, that may reasonably be regarded as unsafe.