On October 7, the OCC and FDIC announced two joint notices of proposed rulemaking addressing unsafe and unsound practices and supervisory standards for banks and eliminating the role of reputation risk in regulatory actions.
First, the agencies’ proposed rule defining “unsafe or unsound practice” under section 8 of the FDI Act would define an unsafe or unsound practice as one that is both “contrary to generally accepted standards of prudent operation,” and either has (i) “materially harmed the financial condition of the institution” or (ii), if continued, “is likely to materially harm the financial condition of the institution or present a material risk of loss to the Deposit Insurance Fund.” Importantly, under the proposed rule, a practice would not be unsafe or unsound if it is “merely possible” that the practice would cause material harm to a financial institution.
The proposal would also create uniform standards for when and how examiners may issue matters requiring attention (MRAs), replacing the agency-level standards currently in effect. It would only permit examiners to issue MRAs in response to practices that have caused — or could be expected to cause — material harm to an institution’s financial condition or a material risk of loss to the Deposit Insurance Fund, or that are actual violations of banking or banking-related law or regulation. The rule clarified that nonbinding supervisory suggestions may continue to be communicated orally or in writing but must not be treated as MRAs. If adopted, the proposed rule would also require supervisory and enforcement actions to be tailored based on financial risk-related factors such as capital structure, risk profile, complexity, and asset size, among others.
Second, the agencies proposed eliminating reputation risk from their supervisory programs. If adopted, the rule would prohibit the agencies from taking “adverse action” against an institution based on reputation risk, which the proposed rule defines as the risk that an institution’s actions or inactions “could negatively impact public perception” for reasons “not clearly and directly related to the financial condition of the institution.”
The proposal would also bar regulators from requiring or encouraging institutions to close or alter accounts or services due to a customer’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.” The agencies stated that the rule responds to concerns — including those in Executive Order 14331: “Guaranteeing Fair Banking For All Americans” (previously covered by InfoBytes here) — that reputation risk can be used as a “pretext” for restricting access to financial services for individuals and businesses. The proposal stated that supervisory actions should be based on objective risks to an institution’s financial condition or violations of law or regulation, not on perceived reputational concerns.
Comments in response to both proposed rules will be due 60 days following publication in the Federal Register.
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