Washington, D.C. — As the OCC considers changes to banks’ recovery planning requirements, they should tailor such requirements to banks’ distinctive business models and risk profiles, the Bank Policy Institute and the American Bankers Association said in a letter filed today.
What we’re saying: “When the OCC first adopted its recovery planning Guidelines in 2016, the OCC stated that ‘a covered bank may tailor its recovery plan to its unique size, risk profile, activities, and complexity,’” the trades said in the letter. “As the OCC now proposes to expand the Guidelines by reducing the asset threshold to $100 billion and introducing a testing standard, we urge the OCC to reiterate that all aspects of the Guidelines are designed to, and will be, implemented in a tailored manner.”
The background: National banks with more than $250 billion in assets are required to maintain “recovery plans” for how they will stabilize their business during a crisis. These plans act as a map of emergency exits to avoid the bank entering into resolution. The OCC recently proposed to extend these recovery plan requirements to national banks with assets between $100 billion and $250 billion, which they frame largely as a response to the banking turmoil of 2023. The agency also proposed a new testing standard that would apply to all banks subject to the requirements. Additionally, the new proposal would treat financial risks and non-financial risks – reputational damage, operational failures – as equal factors in triggering recovery plans, when these risk areas are not equivalent; they should be clearly distinguished from one another. Non-financial risk alone should not automatically activate a recovery plan.
Key point: As the OCC expands the substantive requirements and also extends them to a bigger universe of banks, it should draw clear lines between financial risk and non-financial risk and ensure that the requirements are tailored to banks’ risk profiles and business models.
Our recommendations:
- The OCC should replace the proposed “validation” testing standard, which would be impracticable to implement, with a flexible and risk-based “capabilities assessment” standard. Much like a homeowner cannot truly test the effectiveness of his fire escape plan without an actual house fire taking place, a bank cannot validate a recovery plan in the way envisioned by the OCC without testing it out during a real crisis. For example, there is no way for a bank to practice selling off a business line. Instead, a bank should be able to demonstrate that it is capable of executing recovery plan steps if needed. The evaluation of banks’ capability to put recovery plans into action should be flexible and follow an approach consistent with fellow regulatory agencies; the FDIC and Federal Reserve Board have similarly focused on firms’ own capabilities assessments.
- The proposal should be revised to expressly recognize the fundamental distinction between the roles of financial and non-financial risks in recovery planning. Non-financial risks, such as operational and strategic risk, should be considered in recovery planning, but they play different roles from financial risks. These two different types of risk should be clearly delineated and not treated as parallel to one another. Ultimately, what matters in recovery planning is the manifestation of financial risk as a second-order effect of non-financial risks, and triggers based only on non-financial risk should not automatically activate a recovery plan.
- The OCC should revise and clarify various aspects of the proposed compliance timelines.
Worth noting: The OCC denied the industry’s request for an extension of the 30 day comment period, which adds considerable time pressure to consider the proposals and conform to significant new requirements. BPI and ABA had requested the extension in light of, among other things, the nature of the proposed revisions and the timeline for submission of comments being very short. This has meant that ability of affected banking organizations to obtain input from their respective subject-matter experts has been limited, in particular given that publication in the Federal Register occurred during the week of the July 4th holiday. The trades offer to engage on an ongoing basis with the OCC as these guidelines are developed, given the limited time for comment.
Bottom line: The banking agencies have increasingly eyed large-bank requirements, such as long-term debt requirements and stringent capital and resolution rules, for larger regional banks in response to the 2023 bank failures. In doing so, the agencies should keep the broader goal of regulatory tailoring in mind, ensuring that such requirements fit the actual risk level of regional banks’ business models.
To access a copy of the letter, please click here.
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About Bank Policy Institute.
The Bank Policy Institute is a nonpartisan public policy, research and advocacy group that represents universal banks, regional banks and the major foreign banks doing business in the United States. The Institute produces academic research and analysis on regulatory and monetary policy topics, analyzes and comments on proposed regulations, and represents the financial services industry with respect to cybersecurity, fraud, and other information security issues.
Media Contacts
- Tara Payne, Bank Policy Institute, tara.payne@bpi.com
- Josh Britton, American Bankers Association, jbritton@aba.com
