US regulators are fundamentally reshaping bank supervision around material financial risks, promising greater clarity and fewer process-driven criticisms. Supporters see a more disciplined regulatory regime, while critics fear problems that initially appear minor could escape scrutiny until they threaten banks’ financial health.
US banking supervision is undergoing
a significant philosophical shift as regulators move away from policing
processes and documentation toward concentrating examiner attention on risks
capable of materially damaging institutions.
The Office of the Comptroller of the
Currency and Federal Deposit Insurance Corp. have finalized rules defining an
“unsafe or unsound practice” and establishing new standards for matters
requiring attention, or MRAs.
The reforms effectively introduce a
materiality test governing when supervisory concerns warrant escalation.
Under the new framework, an unsafe or
unsound practice must run contrary to generally accepted standards of prudent
operation and either have materially harmed a bank or be likely, if continued,
to materially damage its financial condition or create a material risk of loss
to the Deposit Insurance Fund.
FDIC Chair Travis Hill said the
reforms “shift the nature of supervisory criticisms” toward fundamental risks
rather than the processes institutions use to manage them.
“In combination, the result is that
examiners will focus only on issues that can have a material impact on the
financial condition of an institution and on actual violations of relevant laws
or regulations,” Hill said.
That does not mean supervisors must
wait until damage occurs. Regulators can still intervene prospectively when
current or reasonably foreseeable circumstances suggest material harm could
result.
However, Hill has stressed that the
prospect of damage must be “more than speculative or merely possible.”
The distinction could significantly
change banks’ relationships with examiners. The FDIC has already closed or is
closing a large majority of outstanding supervisory criticisms that fail to
satisfy its revised standards, while converting many others that do into MRAs.
The OCC is pursuing a parallel
overhaul. Its revised enforcement policies emphasize escalation, tailoring and
corrective measures directly connected to identified deficiencies, while a
separate proposal would distinguish substantive legal violations from technical
ones.
Comptroller Jonathan Gould described
the changes as a “return to risk-based supervision,” arguing that material
financial risks and substantive breaches of law should take precedence over
concerns involving policies, processes and documentation.
