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The FDIC and the OCC have issued a Notice of Proposed Rulemaking that seeks to establish a standard definition for what constitutes an “unsafe or unsound practice.”
“Too often, examiners focus on a litany of process-related items that are unrelated to a bank's current or future financial condition,” Acting FDIC Chairman Travis Hill said, in a statement outlining the NPRM, which was unanimously adopted by the agency board.
As a result, FDIC officials said courts and administrative tribunals have provided different definitions of the term. The proposal, agency officials said, is intended to provide greater consistency for financial institutions.
FDIC officials advised that the definition would focus institution and examiner attention on practices that are likely to materially harm an institution's financial condition, and that this approach would provide an institution's officials additional flexibility to enact day-to-day decisions based on their business judgment and risk tolerance.
FDIC officials also advised that the proposal would establish uniform standards for when and how the agencies may communicate Matters Requiring Attention (MRA) and non-binding supervisory observations as part of the examination process. In addition, the proposal would provide for the tailoring of enforcement actions and MRAs.
The NPRM would establish the following definition of an unsafe or unsound practice:
“An ‘unsafe or unsound practice' is a practice, act, or failure to act, alone or together with one or more other practices, acts, or failures to act, that:(1) Is contrary to generally accepted standards of prudent operation; and
(2)(i) If continued, is likely to—
(A) Materially harm the financial condition of the institution; or
(B) Present a material risk of loss to the Deposit Insurance Fund; or
(ii) Materially harmed the financial condition of the institution.”
Banking trade groups expressed support for the proposal.
“For too long, bank supervision has shifted away from focusing on the most important factors affecting safety and soundness — a shift that has had negative consequences for banks, their customers and the broader economy,” Rob Nichols, President and CEO of the American Bankers Association said. “That is finally beginning to change thanks to new leadership at the regulatory agencies.”
Greg Baer, President and CEO of the Bank Policy Institute also applauded the proposal.
The “proposed rule should help to refocus the examination process on material financial risks,” he said.” Furthermore, it seeks public comment on how best to do that — in contrast with a previously opaque process.”
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