OCC Releases Guidelines on 'Heightened Expectations' for Large National Banks and Savings Associations

by Ballard Spahr LLP

The Office of the Comptroller of the Currency (OCC) recently released proposed amendments to its Part 30 regulations, which reflect the agency's "heightened expectations" for large banks. That release, styled as an "Interim Final Rule," contains detailed risk-management standards for institutions with more than $50 billion in assets. It also places greater responsibility on board members, particularly independent directors, to ensure that the rules are followed and to require that banks have independent audit and risk-management officers who can go straight to the board with concerns.

There is concern that these rule changes could be applied more broadly across the industry. As we noted in a previous alert dealing with new OCC standards for third-party relationships, Comptroller Thomas J. Curry alluded to the "heightened expectations" in his September 2013 speech to an American Banker symposium. While the Interim Final Rule, like the Comptroller's speech, is targeted at large institutions, there is a strong likelihood that, over time, there will be a "trickle down" effect that will result in many of these guidelines being relied on by examiners—and imposed upon smaller institutions—as "best practices."

Furthermore, in the Interim Final Rule OCC has explicitly reserved authority to apply the guidelines to an institution with less than $50 billion in assets if the OCC determines that it is highly complex or otherwise presents a heightened risk. For these reasons, we are encouraging all depository institutions—regardless of size—to analyze these guidelines and begin planning a compliance program tailored to their size, risk profile, and complexity.

The proposed "heightened expectation" standards have intentionally been issued in the form of guidelines, rather than as rules, to give OCC more flexibility in determining whether to require the institution to submit a formal remediation plan. The standards are authorized by Section 39 of the Federal Deposit Insurance Act, which authorizes the appropriate federal banking agency to prescribe safety and soundness standards in the form of either regulations or guidelines. The standards are enforceable under existing provisions in the Part 30 regulations.

The Interim Final Rule's guidelines apply to any national bank, federal savings association, or insured federal branch of a foreign bank, so long as it has average total consolidated assets of $50 billion or more measured on the basis of average total consolidated assets for the previous four calendar quarters. Unlike other regulatory regimes predicated on asset size, once that threshold is crossed, there is no turning back—even if the institution has four quarters with less than $50 billion in total consolidated assets.

The guidance calls for a much more rigorous governance framework (the Framework) for enterprise-wide risk management and identifies discrete roles to be played by such components as front line units, independent risk management, and internal audit. The bank can share its parent's Framework if there is 95 percent overlap; otherwise, it must have its own Framework. The bank should also have a comprehensive, written risk appetite statement that serves as the basis for the Framework. This statement should include both qualitative components and quantitative limits.

A much more proactive role is expected for the directors, who are required to:

  • Oversee the bank's compliance with safe and sound banking practices
  • Establish and implement an effective Framework
  • Provide active oversight of management (including critical evaluation of management's recommendations and decisions by questioning, challenging, and, where necessary, opposing management's proposed actions)
  • Exercise sound, independent judgment

In addition, the board of directors should have at least two independent members who are not part of the bank's or the parent company's management. These independent directors should be given ongoing training on the panoply of the bank's products, services, business lines, and risks, as well as on laws, regulations, and supervisory requirements applicable to the bank.

OCC is requesting comment on all aspects of the Interim Final Rule. Further, consistent with OCC's efforts to integrate the former Office of Thrift Supervision regulations, the release is also requesting comment on its proposal to make Part 30 and all of its appendices applicable to federal savings associations and to remove as superfluous Part 170, which contains comparable regulations that apply to federal savings associations. The deadline for comments is 60 days from the date of publication in the Federal Register (which occurred on January 27, 2014).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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