Washington, D.C. — The OCC and FDIC proposal defining “unsafe or unsound practices” and establishing standards for issuing Matters Requiring Attention would improve bank supervision by focusing examination on material financial risks, the Bank Policy Institute said in a comment letter submitted today.
“For too long, supervision has strayed beyond its legal remit, encouraging examiners to focus on process and immaterial issues rather than material risks. MRAs have been driven by process and preferences rather than safety and soundness. This proposal would bring supervision back to the fundamentals: material risks that threaten a bank’s financial health and the stability of the banking system.” – Greg Baer, President and CEO, Bank Policy Institute
What’s Happening. The OCC and FDIC jointly proposed a rule defining unsafe or unsound practices and creating standards for issuing MRAs, a supervisory sanction that can have severe consequences for institutions’ ability to conduct business. The proposal would:
- Define “unsafe or unsound practices” by regulation to focus on material harm to a bank’s financial condition or material risk of loss to the Deposit Insurance Fund.
- Establish uniform standards for issuing MRAs that would similarly focus supervisory resources on material financial risk and violations of law rather than immaterial procedural matters.
The proposal comes as the Federal Reserve is also revising its supervision approach to center examination on material risk, as outlined in an October memo.
Why It Matters. MRAs carry significant consequences for banks, such as prohibitions on mergers and activity limitations. Currently, they are often used in a way that is inconsistent with the banking agencies’ legal mandate to ensure bank safety and soundness. The proposal would provide regulatory focus by clearly defining the standard for unsafe or unsound practices and MRAs consistent with the law.
Next Steps. In the comment letter, BPI supports adoption of the proposal and aligning the agencies’ practices with the law.
The agencies should also prioritize reforms of the CAMELS ratings system. Without corresponding reforms to the ratings framework, the standards set for unsafe or unsound practices and MRAs in this proposal can be circumvented.
Reputational Risk. BPI also filed a comment letter today responding to the FDIC and OCC’s reputational risk proposal.
Case Study. An example of the dangers of supervision unfocused on material risk is the supervision of Silicon Valley Bank, in which many MRAs were issued but were focused on process-based matters rather than liquidity or interest-rate risk.
Learn More. Access BPI resources on supervision below.
- BPI Statement on Federal Reserve Changes to LFI Rating System
- BPI Statement on Joint Rulemaking to Strengthen Bank Supervision Framework
- The 3 Letters at the Heart of Bank Supervision Dysfunction
- The Bank Examination Problem, and How to Fix It
- What They Are Saying About Bank Supervision
- BPI Statement on Improvements to Federal Reserve Supervision Framework
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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
