On October 7, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) unveiled two significant notices of proposed rulemaking (NPRs) designed to reshape the regulatory landscape for financial institutions. The first NPR aims to eliminate the use of reputation risk as a basis for regulatory actions, thereby reducing subjectivity in supervisory programs. This proposed rulemaking responds to concerns expressed in Executive Order 14331, Guaranteeing Fair Banking for All Americans, 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 second NPR seeks to establish a clear definition of “unsafe or unsound practice” and revise the framework for issuing Matters Requiring Attention (MRAs) and other supervisory communications, with a focus on material financial risks. As of now, “unsafe or unsound practice” is not defined in the statute.
Prohibition on Use of Reputation Risk by Regulators
The first proposed rulemaking seeks to eliminate the concept of “reputation risk” from the supervisory programs of the OCC and FDIC. Historically, reputation risk has been a subjective measure, often leading to inconsistent regulatory actions. The proposed rule aims to codify the removal of reputation risk as a basis for supervisory criticism or adverse actions against financial institutions.
Key Provisions
- Elimination of Reputation Risk: The rule prohibits the agencies from criticizing or taking adverse actions against institutions based on reputation risk. This includes actions related to a person’s or entity’s political, social, cultural, or religious views, constitutionally protected speech, or lawful business activities perceived as politically disfavored.
- Contractual Relationships: The agencies would be barred from instructing institutions to modify or terminate contracts with third parties based on reputation risk.
- Regulatory Amendments: Conforming changes would be made to existing OCC and FDIC regulations to remove references to reputation risk.
Implications
This proposed rule could significantly impact how banks manage their relationships and business strategies. By removing reputation risk from the regulatory equation, institutions may have more freedom to engage in diverse business activities without fear of regulatory repercussions based on subjective perceptions.
Defining ‘Unsafe or Unsound Practice’ and Revising Supervisory Framework
The second proposal aims to define “unsafe or unsound practice” and revise the framework for issuing MRAs and other supervisory communications. This initiative is designed to bring clarity and consistency to enforcement and supervision standards, focusing on material financial risks.
Key Provisions
- Definition of Unsafe or Unsound Practice: The rule proposes a uniform definition, focusing on practices that materially harm or pose a risk to the financial condition of an institution or the Deposit Insurance Fund.
- Standards for MRAs: The proposal establishes criteria for issuing MRAs, limiting them to practices that violate laws or regulations or pose significant financial risks.
- Nonbinding Supervisory Observations: Agencies may provide nonbinding suggestions to enhance institutional practices, provided these are not treated similarly to MRAs.
- Tailoring of Actions: Supervisory and enforcement actions would be tailored based on an institution’s size, complexity, and risk profile.
Implications
By defining “unsafe or unsound practice,” the proposal seeks to reduce ambiguity and ensure that regulatory focus remains on significant financial risks. This could lead to more predictable and transparent supervisory processes, benefiting both regulators and institutions.
Conclusion
These proposed rulemakings represent a shift towards more objective and financially focused regulatory oversight. By eliminating reputation risk and clarifying the definition of unsafe practices, the OCC and FDIC aim to streamline supervision and enhance the stability of the financial system. Stakeholders are encouraged to submit comments on these proposals within 60 days of their publication in the Federal Register.
