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On October 7, the OCC and FDIC jointly proposed two rules to refocus bank supervision on material financial risks and eliminate "reputation risk" from their oversight frameworks. The first proposal would define the term unsafe or unsound practice under the Federal Deposit Insurance Act and revise the agencies' standards for issuing matters requiring attention (MRAs). The second proposal would codify the agencies' removal of reputation risk from supervisory programs and prohibit examiners from taking actions based on a bank's perceived reputational exposure.
The agencies stated that these efforts aim to promote consistency, clarity, and fairness in the supervisory process by concentrating on measurable financial risks rather than subjective reputational concerns.
The proposals would make several key changes:
- Defines unsafe or unsound practice. The rule would define the term to mean any practice, act, or failure to act that is contrary to generally accepted standards of prudent operation and that either materially harms or is likely to materially harm a bank's financial condition, or presents a material risk of loss to the Deposit Insurance Fund.
- Limits when MRAs may be issued. Examiners could issue an MRA only for conduct that could reasonably be expected to become an unsafe or unsound practice under current or foreseeable conditions, or for an actual violation of law or regulation. This would standardize supervisory communications and tie examination downgrades more closely to material safety-and-soundness risks.
- Eliminates "reputation risk" from supervision. The rule would prohibit regulators from criticizing or taking adverse action against a bank on the basis of reputation risk, defined as risk of negative public perception unrelated to the institution's financial or operational condition.
- Prohibits politically motivated account actions. Examiners would be barred from requiring or encouraging banks to open, close, or modify customer or third-party relationships based on political, social, cultural, or religious views, or lawful but politically disfavored activities.
- Clarifies limits and exceptions. The agencies would retain authority to act on risks under the Bank Secrecy Act, anti–money laundering laws, and Office of Foreign Assets Control sanctions but could not use those authorities as a pretext for reputation-risk considerations.
Putting It Into Practice: These joint proposals mark a significant federal shift toward risk-based, objective supervision by removing subjective factors from regulatory decision-making. The FDIC and OCC have framed these rules as extensions of ongoing efforts to align supervision with measurable financial risk and to implement Executive Order 14331, Guaranteeing Fair Banking for All Americans (previously discussed here). Banks should review the proposed standards, which would reshape how examiners issue MRAs and evaluate safety and soundness, and consider the agencies' prior actions to reduce supervisory burden as federal oversight continues to narrow its focus on material financial risks.
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