[Federal Register Volume 90, Number 208 (Thursday, October 30, 2025)]
[Proposed Rules]
[Pages 48835-48849]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-19711]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 4
[Docket ID OCC-2025-0174]
RIN 1557-AF35
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 305
RIN 3064-AG16
Unsafe or Unsound Practices, Matters Requiring Attention
AGENCY: Office of the Comptroller of the Currency, Treasury, and the
Federal Deposit Insurance Corporation.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Office of the Comptroller of the Currency (OCC) and the
Federal Deposit Insurance Corporation (FDIC) propose to define the term
``unsafe or unsound practice'' for purposes of section 8 of the Federal
Deposit Insurance Act and to revise the supervisory framework for the
issuance of matters requiring attention and other supervisory
communications.
DATES: Comments must be received on or before December 29, 2025.
ADDRESSES: Comments should be directed to the agencies as follows:
OCC: Commenters are encouraged to submit comments through the
Federal eRulemaking Portal. Please use the title ``Unsafe or Unsound
Practices, Matters Requiring Attention'' to facilitate the organization
and distribution of the comments. You may submit comments by any of the
following methods:
Federal eRulemaking Portal--Regulations.gov:
Go to https://regulations.gov/. Enter Docket ID ``OCC-2025-0174''
in the Search Box and click ``Search.'' Public comments can be
submitted via the ``Comment'' box below the displayed document
information or by clicking on
[[Page 48836]]
the document title and then clicking the ``Comment'' box on the top-
left side of the screen. For help with submitting effective comments,
please click on ``Commenter's Checklist.'' For assistance with the
Regulations.gov site, please call 1-866-498-2945 (toll free) Monday-
Friday, 9 a.m.-5 p.m. EST, or email [email protected].
Mail: Chief Counsel's Office, Attention: Comment
Processing, Office of the Comptroller of the Currency, 400 7th Street
SW, Suite 3E-218, Washington, DC 20219.
Hand Delivery/Courier: 400 7th Street SW, Suite 3E-218,
Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
Docket ID ``OCC-2025-0174'' in your comment. In general, the OCC will
enter all comments received into the docket and publish the comments on
the Regulations.gov website without change, including any business or
personal information provided such as name and address information,
email addresses, or phone numbers. Comments received, including
attachments and other supporting materials, are part of the public
record and subject to public disclosure. Do not include any information
in your comment or supporting materials that you consider confidential
or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this action by the following method:
Viewing Comments Electronically--Regulations.gov:
Go to https://regulations.gov/. Enter Docket ID ``OCC-2025-0174''
in the Search Box and click ``Search.'' Click on the ``Dockets'' tab
and then the document's title. After clicking the document's title,
click the ``Browse All Comments'' tab. Comments can be viewed and
filtered by clicking on the ``Sort By'' drop-down on the right side of
the screen or the ``Refine Comments Results'' options on the left side
of the screen. Supporting materials can be viewed by clicking on the
``Browse Documents'' tab. Click on the ``Sort By'' drop-down on the
right side of the screen or the ``Refine Results'' options on the left
side of the screen checking the ``Supporting & Related Material''
checkbox. For assistance with the Regulations.gov site, please call 1-
866-498-2945 (toll free) Monday-Friday, 9 a.m.-5 p.m. EST, or email
[email protected].
The docket may be viewed after the close of the comment period in
the same manner as during the comment period.
FDIC: You may submit comments to the FDIC, identified by RIN 3064-
AG16, by any of the following methods:
Agency Website: https://www.fdic.gov/federal-register-publications. Follow instructions for submitting comments on the FDIC's
website.
Email: [email protected]. Include RIN 3064-AG16 in the
subject line of the message.
Mail: Jennifer M. Jones, Deputy Executive Secretary,
Attention: Comments--RIN 3064-AG16, Federal Deposit Insurance
Corporation, 550 17th Street NW, Washington, DC 20429.
Hand Delivery/Courier: Comments may be hand-delivered to
the guard station at the rear of the 550 17th Street NW building
(located on F Street NW) on business days between 7 a.m. and 5 p.m.
Public Inspection: Comments received, including any personal
information provided, may be posted without change to https://www.fdic.gov/federal-register-publications. Commenters should submit
only information they wish to make available publicly. The FDIC may
review, redact, or refrain from posting all or any portion of any
comment that it may deem to be inappropriate for publication, such as
irrelevant or obscene material. The FDIC may post only a single
representative example of identical or substantially identical
comments, and in such cases will generally identify the number of
identical or substantially identical comments represented by the posted
example. All comments that have been redacted, as well as those that
have not been posted, that contain comments on the merits of this
notice will be retained in the public comment file and will be
considered as required under all applicable laws. All comments may be
accessible under the Freedom of Information Act.
FOR FURTHER INFORMATION CONTACT:
OCC: Eden Gray, Assistant Director, Allison Hester-Haddad, Special
Counsel, Marjorie Dieter, Counsel, Harry Naftalowitz, Attorney, Chief
Counsel's Office, 202-649-5490, Office of the Comptroller of the
Currency, 400 7th Street SW, Washington, DC 20219. If you are deaf,
hard of hearing, or have a speech disability, please dial 7-1-1 to
access telecommunications relay services.
FDIC: Division of Risk Management Supervision: Brittany Audia,
Chief, Exam Support Section, (703) 254-0801, [email protected]; Legal
Division, Seth P. Rosebrock, Assistant General Counsel, (202) 898-6609,
[email protected].
SUPPLEMENTARY INFORMATION:
I. Introduction
The OCC and the FDIC (collectively, the agencies) exercise their
enforcement and supervision authority to ensure that supervised
institutions \1\ refrain from engaging in unsafe or unsound practices.
To that effect, the agencies believe it is important to promote greater
clarity and certainty regarding certain enforcement and supervision
standards by defining them by regulation. Moreover, the agencies
believe it is critical that examiners and institutions prioritize
material financial risks over concerns related to policies, process,
documentation, and other nonfinancial risks and that their enforcement
and supervision standards further that prioritization.
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\1\ For purposes of this SUPPLEMENTARY INFORMATION, the term
``institution'' refers to insured depository institutions and any
other institutions subject to supervision or enforcement by the
agencies. The scope of the proposed rule is discussed below.
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Specifically, pursuant to the provisions of section 8 of the
Federal Deposit Insurance Act (FDI Act) (12 U.S.C. 1818), the agencies
are authorized to take enforcement actions against depository
institutions \2\ and institution-affiliated parties \3\ that have
engaged in an ``unsafe or unsound practice.'' As described in section
II.A of this SUPPLEMENTARY INFORMATION, the agencies are proposing to
define by regulation the term ``unsafe or unsound practice'' for
purposes of section 8 of the FDI Act. The proposed implementation of
the definition of ``unsafe or unsound practice'' would apply to the
agencies' supervisory and enforcement activities prospectively only.
Moreover, it would not apply to the agencies' rulemaking activities or
authority.
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\2\ A depository institution generally refers to an insured
depository institution as defined in 12 U.S.C. 1813(c)(2); any
national banking association chartered by the OCC, including an
uninsured association; or a branch or agency of a foreign bank.
Refer to specific provisions of 12 U.S.C. 1818 regarding their
applicability to a specific institution. See 12 U.S.C. 1818(b)(4)-
(5).
\3\ See id. 1813(u).
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In addition, the agencies are proposing to establish uniform
standards for purposes of their communication of certain supervisory
concerns. The agencies each communicate deficiencies that rise to the
level of a matter that requires attention from an institution's board
of directors and management, but the agencies have different standards
for when the agency may communicate these deficiencies.\4\ As described
in
[[Page 48837]]
section II.B of this SUPPLEMENTARY INFORMATION, the agencies are
proposing to establish uniform standards for when and how the agencies
may communicate matters requiring attention (MRAs) as part of the
supervision and examination process, consistent with their underlying
statutory authorities. The proposal also clarifies that the agencies
may communicate other nonbinding suggestions to institutions orally or
in writing to enhance an institution's policies, practices, condition,
or operations as long as the communication is not, and is not treated
by the agency in a manner similar to, an MRA.
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\4\ Specifically, as discussed in more detail below, the OCC has
procedures for the communication of matters requiring attention
(MRAs). The FDIC communicates matters requiring board attention
(MRBAs).
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II. Description of the Proposed Rule
A. Unsafe or Unsound Practices
Based on the agencies' supervisory experience and as a matter of
policy, the agencies propose implementing a definition of ``unsafe or
unsound practice'' for purposes of section 8 of the FDI Act that would
focus on material risks to the financial condition of an institution
and would generally require that an imprudent practice, act, or failure
to act, if continued, would be likely to materially harm the
institution's financial condition. Taking into account statutory text,
legislative history, and case law, the agencies believe that the
proposed regulatory definition fits within the authority Congress
granted to the agencies to take enforcement actions based on unsafe or
unsound practices under section 8 of the FDI Act.\5\ The agencies
believe this change will provide greater consistency for institutions
and institution-affiliated parties and appropriately focus supervisory
and institution resources on the most critical financial risks to
institutions and the financial system.
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\5\ See Groos Nat'l Bank v. OCC, 573 F.2d 889, 897 (5th Cir.
1978) (``The phrase `unsafe or unsound banking practice' is widely
used in the regulatory statutes and in case law, and one of the
purposes of the banking acts is clearly to commit the progressive
definition and eradication of such practices to the expertise of the
appropriate regulatory agencies.'').
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The term ``unsafe or unsound practice'' appears in section 8 of the
FDI Act for purposes of the agencies' enforcement authority. The
statute does not define the term unsafe or unsound practice. An unsafe
or unsound practice may serve as a ground for several types of
enforcement actions under provisions of section 8 of the FDI Act. These
include involuntary termination of deposit insurance by the FDIC,\6\ a
cease-and-desist order,\7\ a temporary cease-and-desist order,\8\ the
removal and prohibition of an institution-affiliated party,\9\ or a
Tier 2 or Tier 3 civil money penalty.\10\ Most enforcement provisions
in section 8 of the FDI Act also include other potential grounds, such
as a violation of law or a breach of fiduciary duty, which are not
affected by the proposed regulatory definition.
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\6\ 12 U.S.C. 1818(a)(2)-(3) (``If the [FDIC] Board of Directors
determines that an insured depository institution or the directors
or trustees of an insured depository institution have engaged or are
engaging in unsafe or unsound practices in conducting the business
of the depository institution . . . the [FDIC] Board of Directors
may issue an order terminating the insured status of such depository
institution effective as of a date subsequent to such finding.'').
\7\ Id. 1818(b)(1) (``If, in the opinion of the appropriate
Federal banking agency, any insured depository institution,
depository institution which has insured deposits, or any
institution-affiliated party is engaging or has engaged, or the
agency has reasonable cause to believe that the depository
institution or any institution-affiliated party is about to engage,
in an unsafe or unsound practice in conducting the business of such
depository institution . . . the agency may issue and serve upon the
depository institution or the institution-affiliated party an order
to cease and desist from any such . . . practice.'').
\8\ Id. 1818(c)(1) (``Whenever the appropriate Federal banking
agency shall determine that . . . the unsafe or unsound practice or
practices . . . or the continuation thereof, is likely to cause
insolvency or significant dissipation of assets or earnings of the
depository institution, or is likely to weaken the condition of the
depository institution or otherwise prejudice the interests of its
depositors prior to the completion of the proceedings conducted
pursuant to paragraph (1) of subsection (b) of this section, the
agency may issue a temporary order requiring the depository
institution or such party to cease and desist from any such . . .
practice and to take affirmative action to prevent or remedy such
insolvency, dissipation, condition, or prejudice pending completion
of such proceedings.'').
\9\ Id. 1818(e) (Subject to additional requirements,
``[w]henever the appropriate Federal banking agency determines that
any institution-affiliated party has, directly or indirectly . . .
engaged or participated in any unsafe or unsound practice in
connection with any insured depository institution or business
institution . . . the appropriate Federal banking agency may suspend
such party from office or prohibit such party from further
participation in any manner in the conduct of the affairs of the
depository institution . . . .'').
\10\ Id. 1818(i) (``[A]ny insured depository institution which,
and any institution-affiliated party who . . . recklessly engages in
an unsafe or unsound practice in conducting the affairs of such
insured depository institution . . . which practice is part of a
pattern of misconduct; causes or is likely to cause more than a
minimal loss to such depository institution; or results in pecuniary
gain or other benefit to such party, shall forfeit and pay a civil
penalty of not more than $25,000 for each day during which such . .
. practice . . . continues . . . . [A]ny insured depository
institution which, and any institution-affiliated party who
knowingly . . . engages in any unsafe or unsound practice in
conducting the affairs of such depository institution; . . . and
knowingly or recklessly causes a substantial loss to such depository
institution or a substantial pecuniary gain or other benefit to such
party by reason of such . . . practice . . . shall forfeit and pay a
civil penalty in an amount not to exceed the applicable maximum
amount determined under subparagraph (D) for each day during which
such . . . practice . . . continues.'').
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The ordinary meaning of the term ``unsafe,'' as defined by the
dictionaries most commonly used at the time section 8 of the FDI Act
was enacted, is a sufficient degree of risk of sufficient harm, injury,
or damage to make a situation not safe.\11\ They defined the term
``unsound'' as a sufficient degree of actual harm, injury, or damage to
make a thing not sound.\12\
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\11\ See, e.g., 16 J.A. Simpson & E.S.C. Weiner, Oxford English
Dictionary 355-66 (2d ed. 1989) (safe); 19 id. at 180 (unsafe).
\12\ See, e.g., 16 id. at 50-52 (sound); 19 id. at 206
(unsound).
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In determining what may be considered an unsafe or unsound practice
under section 8 of the FDI Act, some courts have looked to a standard
articulated by John Horne, then Chairman of the Federal Home Loan Bank
Board (FHLBB) (Horne Standard), during congressional hearings related
to the Financial Institutions Supervisory Act of 1966 (Act of 1966),
which is the source of the agencies cease-and-desist authority in
section 8(b) of the FDI Act.\13\ Specifically, Chairman Horne stated:
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\13\ See, e.g., Gulf Fed. Sav. & Loan Assoc. of Jefferson Parish
v. Fed. Home Loan Bank Bd., 651 F.2d 259, 264 (5th Cir. 1981) (``The
authoritative definition of an unsafe or unsound practice, adopted
in both Houses, was a memorandum submitted by John Horne'').
Chairman Horne's articulation of what constitutes an unsafe or
unsound practice was read into the record in both chambers of
Congress. See 112 Cong. Rec. 25008, 26474 (1966) (remarks of Rep.
Thomas W.L. Ashley and Sen. Absalom W. Robertson).
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Generally speaking, an ``unsafe or unsound practice'' embraces any
action, or lack of action, which is contrary to generally accepted
standards of prudent operation, the possible consequences of which, if
continued, would be abnormal risk or loss or damage to an institution,
its shareholders, or the agencies administering the insurance
funds.\14\
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\14\ 112 Cong. Rec. 26474.
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Representative Patman further described the authority added in the
Act of 1966 as ``aimed specifically at actions impairing the safety or
soundness of . . . insured financial institutions'' and providing the
agencies with ``flexible tools [that] relate strictly to the insurance
risk and to assure the public . . . sound banking facilities.'' \15\
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\15\ Id. at 24984 (remarks of Rep. Wright Patman).
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Courts reviewing cases brought by the agencies have grappled with
the meaning of ``unsafe or unsound practice'' in section 8 of the FDI
Act and have reached different conclusions as to how to apply it. For
example, some courts have applied the Horne Standard without further
elaboration on what the standard entails.\16\ Other courts have
[[Page 48838]]
explained that section 8 of the FDI Act applies to practices that have
a ``reasonably direct effect on an [institution]'s financial
soundness'' \17\ or ``threaten the financial integrity'' of the
institution.\18\ Other courts have required that unsafe or unsound
practices cause ``abnormal risk to the financial stability of the . . .
institution,'' \19\ ``abnormal risk of financial loss or damage,'' \20\
or ``reasonably foreseeable undue risk.'' \21\
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\16\ See, e.g., Greene Cnty. Bank v. FDIC, 92 F.3d 633, 636 (8th
Cir. 1996) (quoting First Nat'l Bank of Eden, S.D. v. Dep't of
Treas., OCC, 568 F.2d 610, 611 n.2 (8th Cir. 1978)); Doolittle v.
NCUA, 992 F.2d 1531, 1538 (11th Cir. 1993) (quoting Nw. Nat'l Bank,
Fayetteville, Ark. v. Dep't of Treas., 917 F.2d 1111, 1115 (8th Cir.
1990)) (construing the term unsafe or unsound practice as applied to
a credit union).
\17\ Gulf Fed. Sav. & Loan Assoc. of Jefferson Parish., 651 F.2d
at 264.
\18\ Johnson v. OTS, 81 F.3d 195, 204 (D.C. Cir. 1996) (quoting
Gulf Fed. Sav. & Loan Assoc. of Jefferson Parish., 651 F.2d at 267).
\19\ In re Seidman, 37 F.3d 911, 928 (3d Cir. 1994); see also
id. at 932 (stating that ``[a]n unsafe or unsound practice has two
components: (1) an imprudent act (2) that places an abnormal risk of
financial loss or damage on a banking institution'').
\20\ Michael v. FDIC, 687 F.3d 337, 352 (7th Cir. 2012) (citing
In re Seidman, 37 F.3d at 932).
\21\ Blanton v. OCC, 909 F.3d 1162, 1172 (D.C. Cir. 2018)
(quoting Landry v. FDIC, 204 F.3d 1125, 1138 (D.C. Cir. 2000)).
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The lack of a Federal statutory definition for the term ``unsafe or
unsound practice'' has resulted in enforcement actions and supervisory
criticisms for concerns not related to material financial risks. The
agencies believe that the proposed regulatory definition faithfully
reflects the intent of the standard as enacted by Congress and aligns
with the interpretations of the term unsafe or unsound practice within
section 8 of the FDI Act by most Federal courts. The proposed
regulatory definition would also provide a consistent nationwide
standard to provide greater clarity for institutions and institution-
affiliated parties.
The agencies believe that the proposed definition of the term
unsafe or unsound practice is also important to appropriately focus
institution and examiner attention on practices that are likely to
materially harm an institution's financial condition, providing the
institution's board of directors and management additional flexibility
to enact day-to-day decisions based on their business judgment and risk
tolerance. The proposed definition reflects the agencies' judgment and
experience that their supervisory resources are best focused on
practices that are likely to materially harm an institution's financial
condition, such as risks that are more likely than other risks to lead
to material financial losses, bank failures, and instability in the
banking system.\22\ For the same reasons, the agencies believe that
practices that are likely to materially harm the financial condition of
an institution are critical for an institution's board of directors and
management to address.
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\22\ In March 2023, several insured depository institutions with
total consolidated assets of $100 billion or more, including Silicon
Valley Bank, experienced significant withdrawals of uninsured
deposits in response to underlying material weaknesses in their
financial position and failed. The agencies believe these failures
highlight the need for the agencies to allocate supervisory
resources with a focus on material financial risks.
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In addition, lack of clarity regarding the scope of the term unsafe
or unsound practice among examiners could lead to inconsistent
application of the terms in communicating supervisory findings.\23\ The
proposed definition of an unsafe or unsound practice should ensure
consistency in identifying practices as unsafe or unsound only where
they are likely to materially harm the financial condition of an
institution, are likely to present a material risk of loss to the
Deposit Insurance Fund (DIF), or have materially harmed the financial
condition of the institution. This definition should focus institution
and examiner attention on core financial risks facing an institution
and otherwise provide the institution's board of directors and
management the flexibility to enact decisions based on their business
judgment and risk tolerance.
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\23\ In addition to enforcement actions under section 8 of the
FDI Act, the agencies identify unsafe or unsound practices as
supervisory findings in other communications, including reports of
examination, supervisory letters, MRAs, and informal enforcement
actions. These identified unsafe or unsound practices sometimes
establish a record for a later enforcement action under section 8 of
the FDI Act. The agencies' identification of an unsafe or unsound
practice is distinct from standards for safety and soundness that
the agencies are required to issue pursuant to 12 U.S.C. 1831p-1.
See 12 CFR parts 30, 364.
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Therefore, as explained further below, in the proposed rule, the
agencies would define the term unsafe or unsound practice to mean 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 DIF; or
(ii) materially harmed the financial condition of the institution.
Imprudent act. Consistent with the Horne Standard, a practice, act,
or failure to act under the proposed definition would have to be
contrary to generally accepted standards of prudent operation to be
considered an unsafe or unsound practice.\24\ The agencies acknowledge
that an essential role of institutions is to identify, measure, incur,
and manage risk. The agencies do not intend to take enforcement actions
under section 8 of the FDI Act for prudent operations that result in
risk-taking. A practice, act, or failure to act could only be
considered an unsafe or unsound practice if it deviates from generally
accepted standards of prudent operation (and otherwise meets the
proposed definition).
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\24\ See, e.g., Michael, 687 F.3d at 352 (citing Van Dyke v.
FRB, 876 F.2d 1377, 1380 (8th Cir. 1989)); Frontier State Bank Okla.
City, Okla. v. FDIC, 702 F.3d 588, 604 (10th Cir. 2012) (citing
Simpson v. OTS, 29 F.3d 1418, 1425 (9th Cir. 1994)); De la Fuente v.
FDIC, 332 F.3d 1208, 12222 (9th Cir. 2003) (citing Simpson, 29 F.3d
at 1425).
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Likely. To qualify as an unsafe or unsound practice under the
proposed definition, it also would have to be likely--as opposed to,
for example, merely possible--that the practice, act, or failure to
act, if continued, would materially harm the financial condition of the
institution or present a material risk of loss to the DIF. The agencies
believe that including the term ``if continued'' is important to allow
for identification of an unsafe or unsound act or failure to act before
it impacts an institution's financial condition. However, the conduct
must be sufficiently proximate to a material harm to an institution's
financial condition to meet the proposed definition.\25\ The agencies
do not intend to identify unsafe or unsound acts or failures to act by
extrapolating from deficient conduct that could potentially result in,
alone or in combination with other factors or events, material harm to
the financial condition of an institution but is not likely to do so.
Moreover, the agencies considered, but did not propose, more precisely
defining the requisite likelihood under the proposed definition, such
as through a minimum percentage (e.g., 10%, 51%). Instead, the agencies
invite comment on whether a minimum percentage likelihood or more
precise definition of ``likely'' is appropriate.
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\25\ Additionally, under the proposal, practices, acts, or
failures to act that have already caused material harm to the
financial condition of the institution would not have to meet the
``likely'' standard, as there would be certainty with respect to the
harm.
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Financial condition. An unsafe or unsound practice would include a
practice, act, or failure to act that, if continued, is likely to
materially harm the financial condition of an institution. The agencies
believe that harm to financial condition includes practices, acts, or
failures to act that are likely to directly, clearly and predictably
impact an institution's capital, asset quality, earnings, liquidity, or
sensitivity to market risk.
[[Page 48839]]
Risk of Loss to the Deposit Insurance Fund. An unsafe or unsound
practice would also include a practice, act, or failure to act that, if
continued, is likely to negatively affect an institution's ability to
avoid FDIC receivership and present a material risk of loss to the DIF
as a result of the failure. For example, the failure of an institution
to implement appropriate contingency funding arrangements might not
pose a risk of material harm to the financial condition of the
institution, but could impair the institution's liquidity under stress
and thus present an increased risk to the DIF. In other words, the
proposed definition would capture a practice, act, or failure to act
that materially increases the probability that an institution would
fail and impose a material risk of loss to the DIF.
Harm. The proposed standard focuses on material harm to financial
condition, and the agencies generally interpret harm to refer to
financial losses. Therefore, to be an unsafe or unsound practice, a
practice, act, or failure to act generally must have either caused
actual material losses to the institution or must be likely to cause
material loss or other negative financial impacts to the
institution.\26\ Conversely, that a practice, act, or failure to act
caused actual but non-material financial losses to the institution is
insufficient to meet the proposed standard.\27\
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\26\ See Landry, 204 F.3d at 1138.
\27\ See Johnson v. OTS, 81 F.3d at 204.
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Nonfinancial risks impacting financial condition. The agencies also
acknowledge that, in limited circumstances, other practices, acts, or
failures to act may be captured because, if continued, they are likely
to cause material harm to an institution's financial condition. For
example, the term unsafe or unsound practice could include critical
infrastructure or cybersecurity deficiencies that are so severe as to,
if continued, be likely to result in a material disruption to the
institution's core operations that prevent the institution, its
counterparties, and its customers from conducting business operations
and, in turn, be likely to cause material harm to the financial
condition of the institution. The standard would not include risks to
the institution's reputation unrelated to financial condition.\28\
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\28\ See Gulf Fed. Sav. & Loan Assoc. of Jefferson Parish, 651
F.2d at 264-65 (``Approving intervention under the [FHLBB]'s ``loss
of public confidence'' rationale would result in open-ended
supervision. . . . The Board's rationale would permit it to decide,
not that the public has lost confidence in Gulf Federal's financial
soundness, but that the public may lose confidence in the fairness
of the association's contracts with its customers.'').
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Material harm. Under the proposed definition, to be considered an
unsafe or unsound practice, the likely harm to an institution's
financial condition or risk of loss to the DIF must also be material.
Risks of minor harm to an institution's financial condition, even if
imminent, would not rise to the level of an unsafe or unsound
practice.\29\ Instead, the agencies will consider the likely harm to an
institution's financial condition to be material if it would materially
impact the institution's capital, asset quality, liquidity, earnings,
or sensitivity to market risk,\30\ or would materially impact the risk
that an institution fails and causes a loss to the DIF. Going forward,
the agencies expect that it would be rare for an institution to exhibit
unsafe or unsound practices, as defined in the proposed rule, based
solely on the institution's policies, procedures, documentation or
internal controls, without significant weaknesses in the institution's
financial condition (i.e., weaknesses that caused material harm to the
financial condition of the institution, or were likely to materially
harm the financial condition of the institution or likely to present
material risk of loss to the DIF). The agencies considered but did not
propose to more precisely define the materiality of harm required under
the proposed definition, such as through measures of capital or
liquidity outflows. Instead, the agencies invite comment on what, if
any, more precise measures of material harm are appropriate.
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\29\ See, e.g., id. at 259 (an institution with $75 million in
assets did not engage in an unsafe or unsound practice when it
misrepresented the calculation of interest rates on loans, which
could have resulted in an $80,000 loss to the institution--a loss of
far less than 1% of the institution's total assets).
\30\ See, e.g., Blanton, 909 F.3d at 1172-73 (an institution-
affiliated party engaged in an unsafe or unsound practice by
permitting a customer to overdraft more than $2 million over two
months, with outstanding overdrafts at one point totaling nearly 65%
of the institution's Tier 1 capital, even though the institution's
capital levels were critically deficient).
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Tailoring required. The proposal also explains that the agencies
will tailor their supervisory and enforcement actions under 12 U.S.C.
1818 (as well as their issuance of MRAs, as discussed further below)
based on the capital structure, riskiness, complexity, activities,
asset size, and any financial risk-related factor that the agencies
deem appropriate. This includes tailoring with respect to the
requirements or expectations set forth in such actions as well as
whether, and the extent to which, such actions are taken. As such, the
agencies expect that finding an unsafe or unsound practice would be a
much higher bar for a community bank than for a larger institution when
considered against the overall operations of the institution. For
example, as applied to the threshold for material harm, the agencies
would not expect that a particular projected percentage decrease in
capital or liquidity that rises to the level of materiality for the
largest institutions would necessarily also be material for community
banks. The agencies invite comment on whether the agencies should
provide additional specificity. Generally, because unsafe or unsound
practices by institution-affiliated parties must, if continued, be
likely to materially harm the financial condition of an institution,
the same tailored standard would, going forward, apply to practices,
acts, or failures to act by institution-affiliated parties of the
institution.
For these reasons, the agencies propose to define the term unsafe
or unsound practice to mean a practice, act, or failure to act, alone
or together with 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 an institution; or (B) present a material risk of loss to
the DIF; or (ii) materially harmed the financial condition of the
institution.
B. Matters Requiring Attention
The agencies are proposing to establish uniform standards for
examiners' communication of MRAs. Under the proposed rule, an examiner
would be permitted to issue an MRA to address certain risks to the
financial condition of an institution and violations of banking or
banking-related laws or regulations.
Through various statutory examination and reporting authorities,
Congress has conferred upon the agencies the authority to exercise
visitorial powers and examination authorities with respect to
supervised institutions.\31\ The Supreme Court has indicated support
for a broad reading of certain visitorial powers.\32\ Examination and
visitorial powers of the agencies facilitate early identification of
supervisory concerns that may not rise to a violation of law, unsafe or
unsound practice, or breach of fiduciary duty under section 8 of the
FDI Act. These
[[Page 48840]]
powers provide the agencies with authority to issue MRAs and
supervisory ratings.\33\
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\31\ 12 U.S.C. 481, 1463, 1464, 1820, 1867, 3105(c), 5412(b).
\32\ See, e.g., Cuomo v. Clearing House Ass'n, 557 U.S. 519
(2009); United States v. Gaubert, 499 U.S. 315 (1991); United States
v. Phila. Nat'l Bank, 374 U.S. 321 (1963).
\33\ See 12 U.S.C. 481, 1463, 1820(b), 1867, 3105(c), 5412(b).
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The OCC's current practice is to use MRAs to communicate concerns
about an institution's ``deficient practices.'' \34\ A deficient
practice is a practice, or lack of practice, that (1) ``deviates from
sound governance, internal control, or risk management principles and
has the potential to adversely affect the bank's condition, including
financial performance or risk profile, if not addressed,'' or (2)
``results in substantive noncompliance with laws or regulations,
enforcement actions, or conditions imposed in writing in connection
with the approval of any applications or other requests by the
[institution].'' \35\ The purpose of an MRA, unlike other forms of
supervisory communications, is to bring a deficient practice to the
attention of the institution's board of directors and management to
ensure they address the deficiency. An MRA is not intended to serve as
a vehicle for examiners to recommend best practices or enhancements to
already acceptable standards. When the OCC communicates an MRA to an
institution, it includes a corrective action stating what management or
the board of directors must do to address the concern and eliminate the
cause.\36\ An institution is expected to develop an action plan to
detail how it intends to correct the root causes of deficiencies rather
than symptoms.\37\ Although an institution has discretion to develop an
adequate action plan as it deems appropriate, the OCC retains the
ultimate authority to determine the method and timeframe for corrective
action. The actions that an institution's board of directors and
management take or agree to take in response to concerns in MRAs are
factors in the OCC's decision to pursue an enforcement action and the
severity of that action.\38\
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\34\ OCC, Comptroller's Handbook, ``Bank Supervision Process''
at 46 (March 2025).
\35\ Id. at 134.
\36\ Id. at 46.
\37\ Id. at 38.
\38\ OCC, Policies and Procedures Manual: PPM 5310-3, ``Bank
Enforcement Actions and Related Matters'' at 3 (May 25, 2022),
available at https://www.occ.gov/news-issuances/bulletins/2023/bulletin-2023-16.html.
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The OCC tracks an institution's MRAs, including whether they are
open, closed, past due, or pending validation. Current OCC policies
require that MRAs must remain open until an institution has
implemented, and examiners have verified and validated that the
institution has consistently adhered to, an effective corrective
action.\39\ Validation requires the institution to demonstrate the
corrective action is effective over a reasonable period, which may vary
and is based on the sustainability of the corrected practice, not the
institution's condition.\40\
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\39\ ``Verification'' is the process by which the OCC confirms
that an institution has implemented the agreed upon corrective
actions to address a deficient practice described in an MRA.
``Validation'' is the process by which the OCC confirms the
effectiveness and sustainability of corrective actions that an
institution has implemented.
\40\ The OCC must determine through examination or review of
audit reports and work papers that the institution's corrective
actions are sustainable.
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For matters that do not warrant an MRA, examiners may offer
informal recommendations to the board of directors and management
related to potential policy enhancements or best practices.\41\
Recommendations do not require specific corrective action or follow-up
by examiners, and the OCC does not include recommendations in formal
written communications to institutions, such as a report of
examination.
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\41\ OCC, Comptroller's Handbook, ``Bank Supervision Process''
at 46.
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The FDIC's current practice is to issue Supervisory
Recommendations, including Matters Requiring Board Attention (MRBAs),
as part of its supervisory process to communicate weaknesses in a
bank's operations, governance, or risk management practices.\42\ These
supervisory tools are designed to promote timely corrective action and
to strengthen institutions' overall safety and soundness.
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\42\ See Statement of the FDIC Board of Directors on the
Development and Communication of Supervisory Recommendations,
available at https://www.fdic.gov/about/governance/recommendations.html.
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MRBAs are used to inform an institution of the FDIC's views about
changes needed in its practices, operations, or financial condition to
help institutions prioritize their efforts to address examiner
concerns, identify emerging problems, and correct deficiencies before
the institution's condition deteriorates.\43\ Boards of directors are
expected to oversee management's development and implementation of
corrective measures and to ensure timely resolution of the matters. The
FDIC reviews the status of MRBAs in subsequent examinations or through
offsite monitoring to ensure progress and remediation. The FDIC tracks
and categorizes MRBAs to enable the agency to analyze and identify
trends related to risk supervision findings.
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\43\ See FDIC, Risk Management Manual of Examination Policies,
Report of Examination Instructions (last updated April 2024), at
16.1-8.
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Other Supervisory Recommendations are issued to highlight
deficiencies or weaknesses that warrant management's attention but do
not rise to the level of MRBAs. These recommendations are intended to
promote sound governance, risk management, and operational practices
and, if left unaddressed, may escalate into more significant
supervisory concerns. Although these Supervisory Recommendations do not
carry the same weight as MRBAs, management is expected to consider and
respond to them and to implement corrective action as appropriate.
The agencies each apply their different standards for MRAs and
MRBAs (collectively, matters requiring correction) to require
institutions to align their conduct with supervisory expectations. But
a common denominator of the agencies' current practices for supervisory
criticisms is that examiners frequently issue matters requiring
correction to communicate deficiencies beyond those that are central
to, or in many cases that are directly relevant to, an institution's
financial condition. The agencies do not currently require examiners to
find that a practice is likely, or reasonably can be expected, to
materially harm the financial condition of the institution. In
practice, an institution must address the practices described in a
matter requiring correction, regardless of whether the institution's
board of directors and management consider the examiner's concerns to
be accurate or important enough to prioritize. The agencies' expansive
definition and application of matters requiring correction has resulted
in a proliferation of supervisory criticisms for immaterial procedural,
documentation, or other deficiencies that distract management from
conducting business and that do not clearly improve the financial
condition of institutions. In addition, in the agencies' supervisory
experience, failure to correct a deficient practice communicated in a
matter requiring correction often eventually results in an enforcement
action.
To ensure supervision efforts are appropriately focused on material
financial risks and increase consistency in supervisory criticisms, the
agencies are issuing this joint proposal regarding their standard for
issuing matters requiring correction, which would be in the form of
MRAs.\44\
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\44\ For the FDIC, MRAs would replace MRBAs.
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The proposed rule would provide that the agencies may only issue an
MRA for a practice, act, or failure to act, alone or
[[Page 48841]]
together with one or more other practices, acts, or failures to act,
that (1)(i) is contrary to generally accepted standards of prudent
operation; and (ii)(A) if continued, could reasonably be expected to,
under current or reasonably foreseeable conditions, (1) materially harm
the financial condition of the institution; or (2) present a material
risk of loss to the DIF; or (B) has already caused material harm to the
financial condition of the institution; or (2) is an actual violation
of a banking or banking-related law or regulation.
Under the proposed rule, the phrases ``materially harm the
financial condition of an institution,'' ``materially harmed the
financial condition of an institution,'' and ``material risk of loss to
the Deposit Insurance Fund'' would have the same meaning for MRAs as
they would have for the proposed definition of unsafe or unsound
practice. The proposed MRA standard would accordingly focus supervisory
and institution resources on material financial risks. Similar to the
proposed definition of an unsafe or unsound practice, practices, acts,
or failures to act that are captured by the proposed MRA standard
would, in the vast majority of cases, relate directly to risks of
material harm to the financial condition of an institution or
violations of certain laws and regulations. Material financial risks
will, in the vast majority of cases, relate directly, clearly and
predictably to an institution's capital, asset quality, earnings,
liquidity, or sensitivity to market risk. Additionally, the proposed
standard for an MRA, like the proposed definition of an unsafe or
unsound practice, would cover a practice, act, or failure to act that,
``if continued,'' has the potential to materially harm the financial
condition of an institution.
As proposed, examiners could communicate an MRA for a practice,
act, or failure to act that, if continued, could reasonably be expected
to, under current or reasonably foreseeable conditions, (A) materially
harm the financial condition of an institution or (B) present a
material risk of loss to the DIF. The agencies intend for the ``could
reasonably be expected to, under current or reasonably foreseeable
conditions'' element in the proposed MRA standard to present a lower
bar than does the ``likely'' element in the proposed unsafe or unsound
practice standard.
To determine whether a practice, act, or failure to act, if
continued, could reasonably be expected to, under current or reasonably
foreseeable conditions, materially harm the financial condition of an
institution, the proposed rule relies on examiners' judgments, based on
objective facts and sound reasoning. The proposal would not permit
examiners to issue MRAs based on potential future conditions that are
possible but not reasonably foreseeable. Nonetheless, ``reasonably
foreseeable'' does not necessarily mean the most likely future outcome
and could include a range of possible outcomes. For example, in late
2022, the agencies could have considered it ``reasonably foreseeable''
that the federal funds rate and other market interest rates would rise
considerably, and an institution's vulnerability to a significant rise
in interest rates could have been grounds for an MRA. However, the
proposal would not permit examiners to issue MRAs that purport to meet
the proposed MRA standard as a pretext to force an institution to
comply with an examiner's managerial judgment instead of the judgment
of the institution's own management, in the absence of a reasonable
expectation of material harm to the financial condition of the
institution.
Under the proposed MRA standard, violations of banking or banking-
related laws and regulations must be actual violations of a discrete
set of federal and state law or regulation--those related to banking.
This would generally include banking and consumer financial protection
laws, but would not include laws and regulations outside of the banking
and consumer finance context, such as tax laws.\45\ Moreover, the
agencies would not issue an MRA solely to address an institution's
policies, procedures, or internal controls, unless those policies,
procedures, or internal controls otherwise satisfied the regulatory
standard for an MRA, even if those policies, procedures, or internal
controls could lead to a violation of law or regulation. Accordingly,
under the proposed rule, examiners could issue an MRA for a practice,
act, or failure to act related to a violation of law or regulation only
if (1) the examiner identified actual violations of a banking or
banking-related law or regulation (as opposed to, for example, bank
policies, procedures, or programs that could lead to violations of such
laws or regulations) or (2) the practice, act, or failure to act meets
the MRA standard in the proposed rule relating to material financial
harm.
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\45\ Banking and consumer financial protection laws include the
enumerated consumer laws under the Consumer Financial Protection
Act, 12 U.S.C. 5481(12), only with respect to institutions for which
the agencies have supervisory or enforcement authority under such
laws under 12 U.S.C. 5515-5516.
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As discussed above, the agencies will tailor their issuance of MRAs
based on the capital structure, riskiness, complexity, activities,
asset size, and any financial risk-related factor that the agencies
deem appropriate. This includes tailoring with respect to the
requirements or expectations set forth in such actions as well as
whether, and the extent to which, such actions are taken.
The agencies also recognize that a more targeted use of MRAs, as
proposed in this rule, may benefit from complementary changes to the
agencies' MRA verification and validation procedures to ensure MRAs are
lifted as soon as practicable after the institution completes
corrective actions. The agencies note that, under current practices,
MRAs are often kept outstanding for a prolonged period of time after an
institution has fully completed its remediation of the underlying
practice, act, or failure to act because examiners seek to see
demonstrated sustainability of the remediation before an MRA is closed.
This practice has the potential to distract an institution's board of
directors and management, as well as examiners, by inflating the number
of MRAs based on practices, acts, or failures to act that have already
been remediated. The agencies invite comment on ways in which the
agencies can improve their respective MRA verification and validation
policies and procedures.
Informal Supervisory Communications
For concerns that do not rise to the level of an MRA, agency
examiners may informally provide non-binding suggestions to enhance an
institution's policies, practices, condition, or operations.\46\ The
OCC refers to these communications as ``supervisory observations.'' For
example, examiners could offer suggestions on ways to enhance an
institution's external audit practices, succession planning, or risk
management processes. Given that these supervisory communications are
not binding, the agencies would not be permitted to require an
institution to submit an action plan to incorporate examiners'
supervisory observations. Examiners would not be permitted, and the
institution would not be required, to track the institution's adoption
or implementation of examiner suggestions. Although examiners would be
permitted to informally make such supervisory communications to the
[[Page 48842]]
institution's board of directors, the institution's management would
not be required to present the supervisory communications to the
institution's board of directors. In addition, the agencies would not
be permitted to criticize an institution for declining to remediate a
concern or weakness identified by such a supervisory communication or
to escalate the communication into an MRA on the sole basis of an
institution's lack of adoption of an examiner's suggestion offered in
multiple examination cycles. If an institution's condition deteriorates
following a supervisory communication, the circumstances underlying the
supervisory communication could later be the basis for an MRA or
enforcement action, but only if the criteria for an MRA or enforcement
action under the proposal are satisfied, and not solely on the basis of
failing to respond to the supervisory communication. This framework
would allow examiners to share their expertise with management and the
board of directors about potential enhancements while leaving decisions
regarding the implementation of any enhancements to the institution.
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\46\ Supervisory observations are separate and distinct from
requirements that the agencies impose in connection with an
application, notice, or other request, including through a condition
imposed in writing under 12 U.S.C. 1818.
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In addition, the agencies would also be permitted to include
supervisory communications in a report of examination to explain
changes in ratings. For example, if a bank is downgraded from a ``1''
to a ``2'' in a particular CAMELS component, the agency may explain
this downgrade, and such an explanation would constitute a
``supervisory communication.'' As noted above, such an explanation
would not impose any binding requirement on an institution to remediate
any weakness identified, and the agency could not further downgrade the
institution solely on the basis of failing to remediate such a
weakness.
C. Composite Ratings Downgrades
The agencies believe that the changes to the standards for unsafe
or unsound practices and MRAs in the proposed rule are important to
prioritize material financial risks and compliance with banking and
banking-related laws and regulations. In furtherance of the agencies'
goal to prioritize attention on material financial risks and legal
compliance, the agencies also expect that any downgrade in an
institution's composite supervisory rating to less-than-satisfactory
\47\ would only occur in circumstances in which the institution
receives an MRA that meets the standard outlined in the proposed rule
or an enforcement action pursuant to the agencies' enforcement
authority, including an enforcement action based on an unsafe or
unsound practice as defined in the proposed rule.\48\ In the case of an
insured depository institution, a composite rating of ``3'' in the
CAMELS rating systems is generally considered ``less-than-
satisfactory.'' \49\ A downgrade to a less-than-satisfactory composite
supervisory rating can have significant regulatory and statutory
consequences for an institution.\50\ By connecting the assignment of a
less-than-satisfactory composite rating to the issuance of MRAs and
enforcement actions, the agencies would generally ensure a less-than-
satisfactory composite rating is tied to a potential material harm to
the institution's financial condition, potential material risk of loss
to the DIF, actual material harm to the institution's financial
condition, or actual violations of certain laws and regulations.
Although section 8 of the FDI Act provides for grounds for an
enforcement action based on a violation of law, the agencies expect
that they would not downgrade an institution's composite rating to
less-than-satisfactory based only on a violation of law, unless such
practice, act, or failure to act that results in the violation of law
also is likely to cause material harm to the financial condition of the
institution, is likely to present a material risk of loss to the DIF,
or has caused material harm to the institution's financial condition,
as the agencies propose under the unsafe or unsound practice
definition.
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\47\ This refers to an institution's composite rating under the
Uniform Financial Institution Rating System (UFIRS). Currently, the
UFIRS incorporates six individual component ratings: capital, asset
quality, management, earnings, liquidity, and sensitivity to market
risk. The UFIRS also incorporates a composite rating, which
functions as an overall assessment of the financial institution. The
composite rating generally bears a close relationship to the
component ratings assigned, but the composite rating is not derived
by computing an arithmetic average of the component ratings. For
federal branches and agencies of foreign banks, this refers to the
institution's composite rating under the rating system applicable to
federal branches and agencies of foreign banks.
\48\ The agencies would not necessarily expect to issue a new
MRA or take an additional enforcement action before further
downgrades in an institution's composite rating unless the
additional downgrade was based on new concerns or there is further
deterioration in the institution's condition.
\49\ OCC, Comptroller's Handbook, ``Bank Supervision Process''
at 71.
\50\ For example, a less-than-satisfactory composite rating may
limit an institution's ability to engage in interstate mergers,
establish a de novo interstate branch, or control or hold an
interest in certain subsidiaries. See 12 U.S.C. 24a, 36(g), 1831u,
1843(m).
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III. Request for Comments
The agencies request feedback on all aspects of the proposed rule,
including:
Question 1: What effect would the proposed rule have on the
agencies' ability to address misconduct by institutions under their
enforcement and supervisory authority? What effect would the proposed
rule have on the agencies' ability to address misconduct by
institution-affiliated parties under their enforcement and supervisory
authority?
Question 2: Does the proposed definition of unsafe or unsound
practice appropriately capture the types of objectionable practices,
acts, or failures to act that should be captured? Please explain.
Question 3: Does the proposed definition of unsafe or unsound
practice provide the agencies with adequate authority to proactively
address risks that could cause a precipitous decline in an
institution's financial condition, such as a liquidity event or a
cybersecurity incident?
Question 4: Other than ``material,'' are there terms that the
agencies should consider to specify the magnitude of the risk required
for a practice, act, or failure to act, to be considered an unsafe or
unsound practice, e.g., ``abnormal,'' ``significant,'' or ``undue''?
Question 5: Is ``likely'' the appropriate standard to specify the
probability of risk required for a practice, act, or failure to act, to
be considered an unsafe or unsound practice? Is another term more
appropriate, e.g., ``reasonably foreseeable,'' ``could reasonably,''
``imminent,'' ``abnormal probability''? Should the agencies specify a
minimum percentage of likelihood? If so, what would be an appropriate
minimum percentage of likelihood? Should the agencies consider a
standard that does not imply an assessment of a forward-looking
probability?
Question 6: Should the agencies consider specifying one or more
quantitative measurements to define or exemplify ``material harm'' to
the financial condition of the institution?
Question 7: Should the agencies define ``materially'' in the
regulation? If so, how?
Question 8: Should the agencies define harm to the financial
condition of an institution in the regulation? If so, how? Should this
include specific indicators or thresholds, or adverse effects to
capital, liquidity, or earnings?
Question 9: Section 8 of the FDI Act uses the term ``unsafe or
unsound practice'' numerous times and in different contexts. Should the
proposed definition of unsafe or unsound practice apply to all uses of
the term within section 8 of the FDI Act? If not, what provisions
should be excluded? Should the agencies have a uniform definition
[[Page 48843]]
for purposes of section 8, as proposed, or should there be nuances
depending on the context?
Question 10: Should the proposed definition of unsafe or unsound
practice apply to other uses of the term or references to section 8 of
the FDI Act within Title 12 of the CFR? If so, what provisions should
be included? What, if any, effect would the proposed definition have on
the agencies' ability to engage in rulemaking?
Question 11: Should the proposed definition of unsafe or unsound
practice apply to uses of the term beyond section 8 of the FDI Act? If
yes, what provisions should be included? For example:
--Tier 2 and Tier 3 Civil Money Penalty provisions (12 U.S.C. 93, 504,
1817, 1972).
--Capital standards in 12 U.S.C. 1464(t).
--Definition of institution-affiliated party in 12 U.S.C. 1813(u).
--Grounds for appointing a conservator or receiver in 12 U.S.C.
1821(c)(5).
Question 12: Is the agencies' use of the term ``generally accepted
standards of prudent operations,'' as described in this proposal,
appropriate for making safety and soundness determinations? Are there
are other terms the agencies should consider using instead?
Question 13: Other than ``could reasonably be expected,'' are there
terms that the agencies should consider to specify the probability of
risk required for a practice, act, or failure to act, to be
communicated as an MRA, e.g., ``could possibly,'' ``could
foreseeably,'' ``would''? Is this standard sufficiently distinct from
the likelihood requirement for unsafe or unsound practices so as to
convey a lower bar?
Question 14: The proposal would allow the agencies to issue MRAs
based on ``reasonably foreseeable conditions.'' Is ``reasonably
foreseeable'' the right standard? As an example, at what point in
Silicon Valley Bank's timeline would an MRA for weaknesses in interest
rate risk management have been (1) appropriate and (2) permissible
under the proposal? If another standard would be more appropriate,
please explain.
Question 15: If the agencies adopt the proposed standard for the
issuance of an MRA, how should the agencies determine when to close an
MRA? Should the agencies provide additional clarity in a final rule?
Are there unique verification and validation concerns associated with
the proposed standard that the agencies should consider? Should
verification and validation procedures be tailored for different types
of institutions, considering factors like the sophistication of an
institution and the frequency of examinations? Should there be a limit
(e.g., one or two quarters; one examination cycle) to the duration that
an MRA may remain open after an institution corrects the practice
resulting in the MRA? If an MRA is not remediated for a certain period
of time, what steps should the agencies take?
Question 16: Should the proposal provide any clarity around
timeframes for remediating MRAs? If so, should small institutions (and
those with limited resources) be provided with longer timeframes to
address MRAs? Should institutions with more severe vulnerabilities
(such as 5-rated institutions) be provided shorter timeframes?
Question 17: Should the proposed standard for issuing MRAs also
apply to issuing violations of law? Why or why not? If a different
standard should apply, please describe the standard and explain why. If
the agencies did not use MRAs for violations of law, how should the
agencies approach violations of law?
Question 18: Under the proposal, the agencies could cite violations
of banking and banking-regulated laws or regulations as MRAs. Is
``banking and banking-related'' the right universe? Should the agencies
provide additional clarity on what constitutes banking and banking-
related laws? If so, what should be included? Should the agencies limit
the scope of banking and banking-related laws to federal banking and
banking-related law? Why or why not?
Question 19: Should the agencies provide additional clarity on the
interplay between MRAs and CAMELS ratings? If so, how?
Question 20: Should the agencies require any downgrade to a CAMELS
composite rating of 3 or below to be accompanied by an MRA or
enforcement action? Are there instances in which, for example, general
economic conditions or idiosyncratic risk factors could cause financial
deterioration without evidence of objectionable practices, acts, or
failures to act? Could such a provision incentivize issuing more MRAs?
Please explain.
Question 21: To what extent should the agencies use MRAs to address
banks that are vulnerable to potential economic or other shocks? For
example, before the Federal Reserve began raising interest rates in
2022, or shortly after it began raising interest rates, at what point,
if any, would it have been appropriate for a banking agency to issue
MRAs to institutions that were vulnerable to a rise in interest rates?
Does the proposal appropriately allow MRAs in such cases, if
applicable? Under the proposal, are there other supervisory tools to
address such risks?
Question 22: How should the agencies tailor the framework for
community banks? For example, should there be different standards for
institutions of different sizes and complexity? Please explain.
Question 23: Should the proposal tie material harm to the financial
condition of an institution more specifically to the impact of a
practice, act or failure to act on the institution's capital? Should
there be a higher standard for large banking organizations compared to
all other banking organizations? Should the potential or actual harm to
an institution's financial condition be tied to the capital standards
in the prompt correction action framework set forth in 12 U.S.C. 1831o?
Question 24: Should the proposed regulation tie material harm to
the financial condition of an institution more specifically to the
impact of a practice, act or failure to act on the institution's
liquidity? Should there be a threshold for a liquidity event, such as
an outflow of a hypothetical percentage of an institution's short-term
deposits or other short-term liabilities over a defined period?
Question 25: How should the proposed regulation interact with the
Interagency Guidelines Establishing Safety and Soundness Standards
promulgated under 12 U.S.C. 1831p-1 (e.g., 12 CFR part 30) (Safety and
Soundness Standards)? Should the agencies similarly revise the Safety
and Soundness Standards in a manner consistent with the proposed
regulation? Should a violation of the Safety and Soundness standards be
considered a violation of banking or banking-related law or regulation
for purposes of the proposed regulation?
Question 26: What additional steps should the agencies consider to
reform supervision, consistent with the goals of the proposal? The
agencies have an extensive supervisory framework including examination
manuals, regulations, guidance, and internal procedures governing how
banks are supervised. What modifications to these various documents are
warranted? How should the agencies sequence these actions?
IV. Expected Effects
As previously discussed, the agencies propose to revise the
framework for communicating MRAs to supervised insured depository
institutions (IDIs) to focus on practices, acts, or failures to act
that, if continued, could reasonably be expected to, under current or
reasonably foreseeable conditions, (A) materially harm the financial
condition of an institution or (B) present a material risk
[[Page 48844]]
of loss to the DIF, or violations of a banking or banking-related law
or regulation. The proposal would provide a consistent nationwide
standard for the issuance of MRAs to promote greater clarity for IDIs
and IDI-affiliated parties.
This analysis utilizes all regulations and guidance applicable to
IDIs supervised by the agencies, as well as information on the
financial condition of supervised IDIs as of the quarter ending June
30, 2025, as the baseline to which the effects of the proposed rule are
estimated.
Scope
The proposal, if adopted, would not impose any obligations on
supervised IDIs, and supervised IDIs would not need to take any action
in response to this rule. The proposal, if adopted, would require the
agencies to revise their current practices regarding the identification
and communication of examination findings. Therefore, the agencies
would be the only entities directly affected by the proposal.
The proposal would indirectly affect supervised IDIs through
examinations and reports of examination (ROEs) conducted by the
agencies. All IDIs subject to examinations by the agencies as of June
30, 2025 could be indirectly affected proposal. Only a subset of IDIs
are examined every year, therefore the proposed rule could indirectly
affect a subset of supervised IDIs each year.
Costs and Benefits
The following sections discuss qualitatively some indirect benefits
and indirect costs of the proposal.
Indirect Benefits to IDIs
The proposal, if adopted, would pose two types of indirect benefits
to supervised IDIs: (1) reductions in, or more efficient use of, costs
to comply with findings from ROEs, and (2) possible increases in
proceeds from the provision of banking products and services. By
raising the standard against which an IDI's action, or inaction, is
assessed to be eligible for an MRA, IDIs may experience lower volumes
of examination findings, particularly MRAs. Further, by potentially
reducing the number of examination findings not related to material
risks to the financial condition of the IDI, the proposed rule may
enable IDIs that do receive MRAs to more effectively address those
risks. Finally, by enacting a consistent definition of conditions that
merit the use of MRAs across the agencies, the proposed rule may
improve clarity and reduce uncertainty of ROE findings, relative to the
baseline. Such reductions in findings and increases in clarity may
reduce compliance costs or increase the efficiency with which
compliance costs are expended by IDIs to respond to ROE findings. The
agencies do not have the information necessary to quantify such
potential indirect benefits.
Negative feedback from regulators during the examination process
may discourage IDIs from taking part in activity and could result in
reduced provision of banking products and services. To the extent that
matters requiring the attention of an institution's board of directors
and management are currently identified and used in a way that raises
potential chilling effects, the proposal could result in fewer such
effects relative to the baseline. A reduction in chilling effects could
enable IDIs to provide financial products and services to entities that
they would not have otherwise. The FDIC does not have the data
necessary to quantify this potential benefit.
Indirect Costs to IDIs
If adopted the proposed rule may reduce the volume of examination
findings communicated to IDIs and this could pose certain indirect
costs. To the extent that the proposed rule, if adopted, delayed the
identification of material risks to the financial condition of an IDI,
such entities could incur higher costs to resolve such issues,
associated losses, and in extreme cases, failure. However, as
previously discussed, the agencies believe that proposed definition of
unsafe or unsound practice better prioritizes the identification and
communication of such risks. Therefore, the agencies believe that such
costs are unlikely to be substantial. Moreover, it is also possible
that under the proposal risks to IDIs and risks of IDI failures could
decrease significantly, because under the proposal IDI management and
examiners would prioritize the identification and remediation of issues
that could result in material financial loss to IDIs.
V. Alternatives Considered
The agencies considered leaving the current regulatory framework
unchanged. However, as previously discussed, the current methods for
communicating certain supervisory examination findings can promote
confusion or not appropriately focus supervisory and institution
resources on the most critical financial risks to institutions and the
financial system. Therefore, the agencies believe that the proposal is
more appropriate.
VI. Regulatory Analyses
Paperwork Reduction Act
The Paperwork Reduction Act of 1995 \51\ (PRA) states that no
agency may conduct or sponsor, nor is the respondent required to
respond to, an information collection unless it displays a currently
valid Office of Management and Budget (OMB) control number. The
agencies have reviewed this proposed rule and determined that it does
not create any information collection or revise any existing collection
of information. Accordingly, no PRA submissions to OMB will be made
with respect to this proposed rule.
---------------------------------------------------------------------------
\51\ 44 U.S.C. 3501-3521.
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Regulatory Flexibility Act
The Regulatory Flexibility Act \52\ (RFA) requires an agency to
consider the impact of its proposed rules on small entities. In
connection with a proposed rule, the RFA generally requires an agency
to prepare an Initial Regulatory Flexibility Analysis (IRFA) describing
the impact of the rule on small entities, unless the head of the agency
certifies that the proposed rule will not have a significant economic
impact on a substantial number of small entities and publishes such
certification along with a statement providing the factual basis for
such certification in the Federal Register. An IRFA must contain: (1) a
description of the reasons why action by the agency is being
considered; (2) a succinct statement of the objectives of, and legal
basis for, the proposed rule; (3) a description of and, where feasible,
an estimate of the number of small entities to which the proposed rule
will apply; (4) a description of the projected reporting,
recordkeeping, and other compliance requirements of the proposed rule,
including an estimate of the classes of small entities that will be
subject to the requirements and the type of professional skills
necessary for preparation of the report or record; (5) an
identification, to the extent practicable, of all relevant Federal
rules that may duplicate, overlap with, or conflict with the proposed
rule; and (6) a description of any significant alternatives to the
proposed rule that accomplish its stated objectives.
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\52\ Id.
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1. OCC
The OCC currently supervises 1,012 institutions (commercial banks,
trust companies, Federal savings associations, and branches or agencies
of foreign banks),\53\ of which
[[Page 48845]]
approximately 609 are small entities under the RFA.\54\
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\53\ Based on data accessed using the OCC's Financial
Institutions Data Retrieval System on September 8, 2025.
\54\ The OCC bases its estimate of the number of small entities
on the Small Business Administration's size thresholds for
commercial banks and savings institutions, and trust companies,
which are $850 million and $47 million, respectively. Consistent
with the General Principles of Affiliation, 13 CFR 121.103(a), the
OCC counted the assets of affiliated financial institutions when
determining if it should classify an OCC-supervised institution as a
small entity. The OCC used average quarterly assets in December 31,
2024 to determine size because a ``financial institution's assets
are determined by averaging the assets reported on its four
quarterly financial statements for the preceding year.'' See
footnote 8 of the U.S. Small Business Administration's Table of Size
Standards.
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In general, the OCC classifies the economic impact on an individual
small entity as significant if the total estimated impact in one year
is greater than 5 percent of the small entity's total annual salaries
and benefits or greater than 2.5 percent of the small entity's total
non-interest expense. Furthermore, the OCC considers 5 percent or more
of OCC-supervised small entities to be a substantial number, and at
present, 30 OCC-supervised small entities would constitute a
substantial number. Therefore, since the proposed rule would affect all
OCC-supervised institutions, a substantial number of OCC-supervised
small entities would be impacted.
This proposed rulemaking imposes no new mandates, and thus no
direct costs, on affected OCC-supervised institutions. Therefore, the
proposed rule would not have a significant economic impact on a
substantial number of small entities.
2. FDIC
Generally, the FDIC considers a significant economic impact to be a
quantified effect in excess of 5 percent of total annual salaries and
benefits or 2.5 percent of total noninterest expenses. The FDIC
believes that effects in excess of one or more of these thresholds
typically represent significant economic impacts for FDIC-insured
institutions.
The FDIC believes that the proposed rule will not have a
significant economic impact on a substantial number of small entities
\55\ because the proposed rule will not pose reporting, recordkeeping
and other compliance requirements \56\ on small, FDIC-supervised IDIs.
However, the proposed rule could present significant indirect benefits
to small, FDIC-supervised IDIs. Therefore, the FDIC is presenting an
Initial Regulatory Flexibility Act Analysis in this section.
---------------------------------------------------------------------------
\55\ SBA defines a small banking organization as having $850
million or less in assets, where an organization's ``assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See 13 CFR 121.201
(as amended by 87 FR 69118, effective December 19, 2022). In its
determination, the ``SBA counts the receipts, employees, or other
measure of size of the concern whose size is at issue and all of its
domestic and foreign affiliates.'' See 13 CFR 121.103. Following
these regulations, the FDIC uses an insured depository institution's
affiliated and acquired assets, averaged over the preceding four
quarters, to determine whether the insured depository institution is
``small'' for the purposes of the RFA.
\56\ 5 U.S.C. 603(b)(4).
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Reasons Why This Action Is Being Considered
The lack of a consistent nationwide standard about the scope of the
term unsafe or unsound practice, as interpreted by the courts, has
caused uncertainty for institutions and institution-affiliated
parties.\57\ The proposed regulatory definition would provide a
consistent nationwide standard to reduce burden and provide greater
clarity for institutions and institution-affiliated parties.
---------------------------------------------------------------------------
\57\ See, e.g., Calcutt v. FDIC, 37 F.4th 293, 325 (6th Cir.
2022), rev'd on other grounds, 598 U.S. 623 (2023) (citing Seidman,
37 F.3d at 926-27) (``[Twelve U.S.C. 1818] does not define an
`unsafe or unsound practice,' and the term is interpreted
flexibly.''); id. at 353-57 (Murphy, J., dissenting) (discussing
circuit split and reliance on legislative history as opposed to
plain text); see also Greene Cnty. Bank, 92 F.3d at 636.
---------------------------------------------------------------------------
Policy Objectives
The policy objectives are to promote greater clarity and certainty
regarding enforcement and supervision standards so that examiners and
IDIs prioritize material financial risks to IDIs and avoid unnecessary
regulatory burden.
Legal Basis
Pursuant to the provisions of section 8 of the FDI Act (12 U.S.C.
1818), the FDIC is authorized to take enforcement actions against
depository institutions,\58\ and institution-affiliated parties \59\
that have engaged in an ``unsafe or unsound practice.'' Under this
authority, the FDIC is proposing to define by regulation the term
``unsafe or unsound practice'' for purposes of section 8 of the FDI
Act. For a more detailed discussion of the proposed rule's legal basis
please refer to section A. Unsafe or Unsound Practices, within Section
II of the preamble.
---------------------------------------------------------------------------
\58\ A depository institution generally refers to an insured
depository institution as defined in 12 U.S.C. 1813(c)(2); any
national banking association chartered by the OCC, including an
uninsured association; or a branch or agency of a foreign bank.
Refer to specific provisions of 12 U.S.C. 1818 regarding their
applicability to a specific institution. See 12 U.S.C. 1818(b)(4)-
(5).
\59\ See id. 1813(u).
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Description of the Rule
The agencies propose implementing a definition of unsafe or unsound
practice for purposes of section 8 of the FDI Act that would focus on
material risks to the financial condition of an IDI and require the
likelihood that an imprudent practice, act, or omission, if continued,
would pose a material risk to the IDI's financial condition. The
agencies are also proposing to establish uniform standards for
examiners' communication of MRAs. Under the proposed rule, an examiner
would be permitted to issue an MRA to address certain risks to the
financial condition of an institution. For a more detailed description
of the proposal please refer to section A. Unsafe or Unsound Practices,
within Section II of the preamble.
Small Entities Affected
The proposal, if adopted, would not impose any obligations on
small, FDIC-supervised entities, and supervised entities would not need
to take any action in response to this rule. The proposal, if adopted,
would require the FDIC to revise their current practices regarding the
communication of IDI examination findings. Therefore, the FDIC would be
the only entity directly affected by the proposal.
The proposal would indirectly affect small, FDIC-supervised IDIs
through examinations and reports of examinations conducted by the
agencies. As of the quarter ending June 30, 2025, the FDIC supervised
2,808 IDIs, of which 2,085 are small entities for the purposes of the
RFA.\60\ Only a subset of small, FDIC-supervised IDIs are examined
every year, therefore the proposed rule could indirectly affect a
subset of small, FDIC-supervised IDIs each year.
---------------------------------------------------------------------------
\60\ FDIC Call Report Data, June 30, 2025.
---------------------------------------------------------------------------
Cost and Benefits
To estimate the expected effects of the proposal, this analysis
considers all relevant regulations and guidance applicable to these
institutions, as well as information on the financial condition of all
IDIs as of the quarter ending June 30, 2025.
The proposal, if adopted, would pose two types of indirect benefits
to small, FDIC-supervised IDIs: (1) reductions in, or more efficient
use of, costs to comply with findings from ROEs, and (2) possible
increases in proceeds from the provision of banking products and
services. By raising the standard against which an IDI's action, or
inaction, is assessed to be eligible for an MRA, IDIs may experience
lower volumes of examination findings, particularly MRAs. Further, by
potentially reducing the number of examination findings not
[[Page 48846]]
related to material risks to the financial condition of the IDI, the
proposed rule may enable IDIs that do receive MRAs to more effectively
address those risks. Finally, by enacting a consistent definition of
conditions that merit the use of MRAs across agencies the proposed rule
may improve clarity and reduce uncertainty of ROE findings, relative to
the baseline. Such reductions in findings and increases in clarity may
reduce compliance costs or increase the efficiency with which
compliance costs are expended by IDIs to respond to ROE findings. The
agencies do not have the information necessary to quantify such
potential indirect benefits.
Negative feedback from regulators during the examination process
may discourage IDIs from taking part in activity and could result in
reduced provision of banking products and services. To the extent that
matters requiring the attention of an institution's board of directors
and management are currently identified and used in a way that raises
potential chilling effects by, the proposal could result in fewer such
effects relative to the baseline. A reduction in chilling effects could
enable IDIs to provide financial products and services to entities that
they would not have otherwise. The FDIC does not have the data
necessary to quantify this potential benefit. Moreover, it is also
possible that under the proposal risks to small, FDIC-supervised IDIs
and risks of IDI failures could decrease significantly, because under
the proposal IDI management and examiners would prioritize the
identification and remediation of issues that could result in material
financial loss to IDIs.
FDIC cannot quantitatively estimate the indirect effects that
small, FDIC-supervised IDIs are likely to incur if the proposed rule
were adopted. However, in the four quarters ending June 30th, 2025, 5
percent of total annual salaries and benefits or 2.5 percent of total
noninterest expenses amounts to $139,850 and $124,175, respectively,
for the median small, FDIC-supervised institution.\61\ The indirect
benefits that a small, FDIC-supervised institution could realize as a
result of the proposed rule would depend on changes in the volume of
findings of examination and the compliance costs to address those
examination findings, relative to the baseline. The proposed rule would
establish a definition of unsafe or unsound practice that would result
in issuances of MRAs only where a practice, act, or failure to act
that, if continued, could reasonably be expected to, under current or
reasonably foreseeable conditions, materially harm the financial
condition of an institution. The FDIC believes that it is plausible
that the proposed rule, if adopted, could pose indirect benefits to
FDIC-supervised IDIs that exceed $139,850 and $124,175 a year for a
substantial number of small, FDIC-supervised IDIs.
---------------------------------------------------------------------------
\61\ FDIC Call Report Data, June 30, 2025.
---------------------------------------------------------------------------
The FDIC invites comments on all aspects of the supporting
information provided in this RFA section, and in particular, whether
the proposed rule would have any significant effects on small entities
that the FDIC has not identified?
OCC Unfunded Mandates Reform Act
The OCC has analyzed the proposed rule under the factors in the
Unfunded Mandates Reform Act of 1995 (UMRA).\62\ Under this analysis,
the OCC considered whether the proposed rule includes a Federal mandate
that may result in the expenditure by State, local, and tribal
governments, in the aggregate, or by the private sector, of $100
million or more in any one year ($187 million as adjusted annually for
inflation). Pursuant to section 202 of the UMRA,\63\ if a proposed rule
meets this UMRA threshold, the OCC would need to prepare a written
statement that includes, among other things, a cost-benefit analysis of
the proposal. The UMRA does not apply to regulations that incorporate
requirements specifically set forth in law.
---------------------------------------------------------------------------
\62\ 2 U.S.C. 1531 et seq.
\63\ Id. 1532.
---------------------------------------------------------------------------
This proposed rulemaking imposes no new mandates--and thus no
direct costs--on affected OCC-supervised institutions. The OCC,
therefore, concludes that the proposed rule would not result in an
expenditure of $187 million or more annually by state, local, and
tribal governments, or by the private sector. Accordingly, the OCC has
not prepared the written statement described in section 202 of the
UMRA.
Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act of 1994, 12 U.S.C. 4802(a), in determining
the effective date and administrative compliance requirements for new
regulations that impose additional reporting, disclosure, or other
requirements on insured depository institutions, the agencies will
consider, consistent with principles of safety and soundness and the
public interest: (1) any administrative burdens that the proposed rule
would place on depository institutions, including small depository
institutions and customers of depository institutions; and (2) the
benefits of the proposed rule. The agencies request comment on any
administrative burdens that the proposed rule would place on depository
institutions, including small depository institutions, and their
customers, and the benefits of the proposed rule that the agencies
should consider in determining the effective date and administrative
compliance requirements for a final rule.
Providing Accountability Through Transparency Act of 2023
The Providing Accountability Through Transparency Act of 2023, 12
U.S.C. 553(b)(4), requires that a notice of proposed rulemaking include
the internet address of a summary of not more than 100 words in length
of a proposed rule, in plain language, that shall be posted on the
internet website www.regulations.gov.
The Office of the Comptroller of the Currency and the Federal
Deposit Insurance Corporation propose to define the term ``unsafe or
unsound practice'' for purposes of 12 U.S.C. 1818 and to revise the
supervisory framework for the issuance of Matters Requiring Attention
and other supervisory communications.
The proposal and the required summary can be found at https://www.regulations.gov by searching for Docket ID OCC-2025-0174 and
https://occ.gov/topics/laws-and-regulations/occ-regulations/proposed-issuances/index-proposed-issuances.html.
Executive Order 12866
Executive Order 12866, titled ``Regulatory Planning and Review,''
as amended, requires the Office of Information and Regulatory Affairs
(OIRA), Office of Management and Budget to determine whether a proposed
rule is a ``significant regulatory action'' prior to the disclosure of
the proposed rule to the public. If OIRA finds the proposed rule to be
a ``significant regulatory action,'' Executive Order 12866 requires the
agencies to conduct a cost-benefit analysis of the proposed rule.
Executive Order 12866 defines ``significant regulatory action'' to mean
a regulatory action that is likely to (1) have an annual effect on the
economy of $100 million or more or adversely affect in a material way
the economy, a sector of the economy, productivity, competition, jobs,
the environment, public health or safety, or State, local, or tribal
governments or communities; (2) create a serious inconsistency or
otherwise interfere with an action taken or
[[Page 48847]]
planned by another agency; (3) materially alter the budgetary impact of
entitlements, grants, user fees, or loan programs or the rights and
obligations of recipients thereof; or (4) raise novel legal or policy
issues arising out of legal mandates, the President's priorities, or
the principles set forth in Executive Order 12866.
OIRA has deemed that this proposed rule is an economically
significant regulatory action under Executive Order 12866 and,
therefore, is subject to review under Executive Order 12866. The
agencies' analysis conducted in connection with Executive Order 12866
is set forth below.
1. OCC
The OCC currently supervises 1,012 national banks, federal savings
associations, trust companies and branches and agencies of foreign
banks (collectively, banks). This proposed rule would apply to all OCC-
supervised institutions. The OCC expects that OCC-supervised
institutions would have both direct and indirect benefits as well as
indirect costs as a result of this proposal.
Specifically, the proposed rule would result in several direct
benefits to OCC-supervised institutions, namely, significant cost and
time savings to institutions because they would have fewer MRA
issuances and enforcement actions (collectively, issues) to address
going forward. Banks can incur significant direct costs arising from
issues. For example, some banks hire external consultants, for which
hourly rates can range from between $300 and $1,200 an hour for top
tier firms 64 65 to $150 to $300 an hour for lower tier
firms. And financial advisory firms may charge $250 to $550 per
hour.66 67 To the extent that there may be less need for
consultants, banks will directly benefit from consultant cost savings.
---------------------------------------------------------------------------
\64\ See Clancy Fossum, Embark, What Are The Fees & Hourly Rates
Of Accounting Consulting Firms? (Nov. 13, 2019), https://
blog.embarkwithus.com/what-are-the-fees-hourly-rates-of-accounting-
consulting-firms#:~:text=in%20each%20category.-
,Big%204%20Firms,global%20footprints%2C%20and%20charge%20accordingly.
&text=Although%20Big%204%20fees%20in,be%20aware%20of%20before%20proce
eding.
\65\ See Consulting Mavericks, Average Consulting Rates By
Industry, https://consultingmavericks.com/start/other/average-consulting-rates-by-industry/ (last visited Sept. 26, 2025).
\66\ Note, these price ranges are as of 2019 economy prices.
\67\ Financial advisory firms offer a wide range of services to
clients that could be useful for MRA remediation. However, they
typically do not provide traditional accounting services and do not
sign off on opinions or certifications the way accounting firms do.
---------------------------------------------------------------------------
In addition to consultant fees, banks incur other direct costs to
successfully address issues and pay any associated penalties. These
costs may include increased hiring and retention of appropriately
qualified employees, training for existing employees, time expenditure
of employees (which may include time spent addressing the underlying
issue, time by management and the board to review and approve changes
made, time spent working with external consultants, time conducting
internal audit verification, and time spent in partnership with the OCC
in ongoing follow up communications and possibly examinations specific
to the issue), updating processes and procedures, and addressing the
underlying issue itself. If the issue has to do with bank systems or
infrastructure, these costs could include technology costs, which could
be very costly expenditures. If banks do not remediate issues in a
timely fashion, they may also incur additional fines and penalties on
top of the costs to remediate the issue itself.68 69
---------------------------------------------------------------------------
\68\ See Perry Menezes et al., CSO Online, How Financial
Institutions Can Reduce Security and Other Risks from MRAs [verbar]
CSO Online (Aug. 29, 2023), https://www.csoonline.com/article/
650386/how-financial-institutions-can-reduce-security-and-other-
risks-from-
mras.html#:~:text=MRAs%20are%20expensive,has%20not%20done%20its%20job
.
\69\ According to a 2021 survey by Better Market, the largest
U.S. banks have incurred almost $200 billion in aggregate fines and
penalties over the previous 20 years from the time of the survey.
See BIP. Monticello Consulting Group, Building Regulatory
Resilience: A Deeper Look into Consent Orders & MRAs (Apr. 20,
2021), https://www.monticellocg.com/blog/2021/04/20/building-regulatory-resilience-a-deeper-look-into-consent-orders-mras#_ftn2.
---------------------------------------------------------------------------
While it would be difficult to precisely quantify the overall
aggregate annual direct cost savings to OCC supervised institutions,
the OCC expects that this proposal would result in an immediate and
material cost savings to affected institutions, easily ranging from
hundreds of millions to billions of dollars saved annually in
aggregate. In addition to the significant direct cost savings from no
longer needing to address issues, banks could potentially experience
several indirect benefits, including clarity and consistency regarding
MRA or enforcement concerns and less staffing turnover.
Regarding direct costs, this proposed rulemaking imposes no new
mandates, and thus no direct costs, on affected OCC-supervised
institutions. Regarding indirect costs, fewer issues may lead to
delayed identification of material risks, which could include higher
costs to resolve such issues, associated losses, and in extreme cases,
failure. Nevertheless, those risks should be low because the proposed
definition endeavors to more effectively prioritize the identification
of material financial risks (i.e., those most likely to cause
significant stress) and therefore to lower the risk of bank failure.
Accordingly, it is also possible that under the proposal risks to banks
and risks of bank failures could decrease significantly, because under
the proposal bank management and bank examiners would prioritize the
identification and remediation of issues that could result in material
financial loss to banks. Ultimately, the net effect will be dependent
upon agency policies and oversight and responses by bank management to
this proposal.
Overall, the OCC expects that the combined effects of the proposed
rule's changes to result in net direct impact of a significant cost
savings to all OCC-supervised institutions, easily ranging from
hundreds of millions to several billion dollars in aggregate. There are
also no explicit mandates in the proposal for affected institutions.
How the proposal is executed and bank responses to the execution will
ultimately determine the net impact over the longer term.
2. FDIC
This analysis utilizes all regulations and guidance applicable to
FDIC-supervised IDIs, as well as information on the financial condition
of IDIs as of the quarter ending June 30, 2025, as the baseline to
which the effects of the proposed rule are estimated.
Scope
The proposal, if adopted, would not impose any obligations on FDIC-
supervised IDIs, and supervised IDIs would not need to take any action
in response to this rule. The proposal, if adopted, would require the
FDIC to revise their current practices regarding the identification and
communication of examination findings. Therefore, the FDIC would be the
only entity directly affected by the proposal.
The proposal would indirectly affect FDIC-supervised IDIs through
examinations conducted by the FDIC, and the resulting ROEs. All FDIC-
supervised IDIs are subject to examination by the FDIC. As of the
quarter ending June 30, 2025, the FDIC supervised 2,808 IDIs.\70\
However, only a subset of IDIs are examined every year, therefore the
proposed rule could
[[Page 48848]]
indirectly affect a subset of FDIC-supervised IDIs each year.
---------------------------------------------------------------------------
\70\ FDIC Call Report data, June 30, 2025.
---------------------------------------------------------------------------
Annual Effect on the Economy or Adverse Effect
The proposal, if adopted, would pose two types of indirect benefits
to FDIC-supervised IDIs: (1) reductions in, or more efficient use of,
costs to comply with findings from ROEs, and (2) possible increases in
proceeds from the provision of banking products and services. By
raising the standard against which an FDIC-supervised IDI's action, or
inaction, is assessed to be eligible for an MRA, IDIs may experience
lower volumes of examination findings, particularly MRAs. Further, by
potentially reducing the number of examination findings not related to
material risks to the financial condition of the IDI, the proposed rule
may enable IDIs that do receive MRAs to more effectively address those
risks. Finally, by enacting a consistent definition of conditions that
merit the use of MRAs across the agencies, the proposed rule may
improve clarity and reduce uncertainty of ROE findings, relative to the
baseline. Such reductions in findings and increases in clarity may
reduce compliance costs or increase the efficiency with which
compliance costs are expended by FDIC-supervised IDIs to respond to ROE
findings. The FDIC does not have the information necessary to quantify
such potential indirect benefits.
Negative feedback from regulators during the examination process
may discourage FDIC-supervised IDIs from taking part in activity and
could result in reduced provision of banking products and services. To
the extent that matters requiring the attention of an institution's
board of directors and management are currently identified and used in
a way that raises potential chilling effects, the proposal could result
in fewer such effects relative to the baseline. A reduction in chilling
effects could enable FDIC-supervised IDIs to provide financial products
and services to entities that they would not have otherwise. The FDIC
does not have the data necessary to quantify this potential benefit.
Moreover, it is also possible that under the proposal risks to IDIs and
risks of IDI failures could decrease significantly, because under the
proposal IDI management and examiners would prioritize the
identification and remediation of issues that could result in material
financial loss to IDIs.
If adopted the proposed rule may reduce the volume of examination
findings communicated to FDIC-supervised IDIs and this could pose
certain indirect costs. To the extent that the proposed rule, if
adopted, delayed the identification of material risks to the financial
condition of an IDI, such entities could incur higher costs to resolve
such issues, associated loses, and in extreme cases, failure. However,
as previously discussed, the FDIC believe that the proposed definition
of unsafe or unsound better practice prioritizes the identification and
communication of such risks. Therefore, the FDIC believes that such
costs are unlikely to be substantial.
FDIC cannot quantitatively estimate the indirect effects that FDIC-
supervised IDIs are likely to incur if the proposed rule were adopted.
However, assuming that all FDIC-supervised IDIs are subject to a bank
examination once every 18 months the proposed rule would only need to
pose $53,419 in indirect benefits, on average, to FDIC-supervised IDIs
to result in an annual economic effect in excess of $100 million.\71\
Based on the preceding analysis the FDIC believes that the proposed
regulatory action could plausibly result in an annual effect on the
economy of $100 million or more. However, the FDIC does not believe
that the proposed rule will adversely affect in a material way the
economy, a sector of the economy, productivity, competition, jobs, the
environment, public health or safety, or State, local, or tribal
governments or communities.
---------------------------------------------------------------------------
\71\ $100,000,000/(2,808/1.5) = $53,418.80.
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Serious Inconsistency
The FDIC does not believe the proposed regulatory action would
create a serious inconsistency or otherwise interfere with an action
taken or planned by another agency. Currently, the FDIC and OCC use
distinct terminology to identify and communicate deficiencies that rise
to the level of a matter that requires attention from an institution's
board of directors and management. The agencies are proposing to
jointly revise the terminology and thresholds for the issuance of MRAs
in their supervisory programs. Therefore, the FDIC believes that this
regulatory action would not create a serious inconsistency or otherwise
interfere with an action taken or planned by another agency, but rather
would remove existing inconsistencies.
Material Alternation
The FDIC does not believe the proposed regulatory action would
materially alter the budgetary impact of entitlements, grants, user
fees, or loan programs or the rights and obligations of recipients
thereof. The proposed regulatory action does nothing to alter
entitlements, grants, user fees, or loan programs or the rights and
obligations of the recipients of such programs.
Novel Legal or Policy Issues
The FDIC does not believe the proposed regulatory action would
raise novel legal or policy issues arising out of legal mandates, the
President's priorities, or the principles set forth in Executive Order
12866. The FDIC has experience in conducting examinations of the safety
and soundness of IDIs and communicating their findings in a variety of
ways since its inception. Further, IDIs have an existing mandate to
operate in a safe and sound manner.\72\ Therefore, this proposed
regulatory action does not raise any novel legal or policy issues.
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\72\ 12 CFR part 364 establishes standards for safety and
soundness for supervised institutions.
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Executive Order 14192
Executive Order 14192, titled ``Unleashing Prosperity Through
Deregulation,'' requires that an agency, unless prohibited by law,
identify at least 10 existing regulations to be repealed when the
agency publicly proposes for notice and comment or otherwise
promulgates a new regulation with total costs greater than zero.
Executive Order 14192 further requires that new incremental costs
associated with new regulations shall, to the extent permitted by law,
be offset by the elimination of existing costs associated with at least
ten prior regulations. The agencies anticipate that the proposed rule
will not be a regulatory action for purposes of Executive Order 14192.
List of Subjects
12 CFR Part 4
Administrative practice and procedure, Freedom of information,
Individuals with disabilities, Minority businesses, Organization and
functions (Government agencies), Reporting and recordkeeping
requirements, Women.
12 CFR Part 305
Banks, Banking, Organization and functions (Government agencies).
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set out in the preamble, the OCC proposes to amend
chapter I of title 12 of the Code of Federal Regulations as follows:
[[Page 48849]]
PART 4--ORGANIZATION AND FUNCTIONS, AVAILABILITY AND RELEASE OF
INFORMATION, CONTRACTING OUTREACH PROGRAM, POST-EMPLOYMENT
RESTRICTIONS FOR SENIOR EXAMINERS
0
1. Revise the authority citation for part 4 to read as follows:
Authority: 5 U.S.C. 301, 552; 12 U.S.C. 1, 93a, 161, 481, 482,
484(a), 1442, 1462a, 1463, 1464, 1467a, 1817(a), 1818, 1820, 1821,
1831m, 1831p-1, 1831o, 1833e, 1867, 1951 et seq., 2601 et seq., 2801
et seq., 2901 et seq., 3101 et seq., 3102(b), 3401 et seq.,
3501(c)(1)(C), 5321, 5412, 5414; 15 U.S.C. 77uu(b), 78q(c)(3); 18
U.S.C. 641, 1905, 1906; 29 U.S.C. 1204; 31 U.S.C. 5318(g)(2), 9701;
42 U.S.C. 3601; 44 U.S.C. 3506, 3510; E.O. 12600 (3 CFR, 1987 Comp.,
p. 235).
0
2. Add subpart G, consisting of Sec. Sec. 4.91 and 4.92, to read as
follows:
Subpart G--Enforcement and Supervision Standards
Sec.
4.91 [Reserved]
4.92 Enforcement and supervisory standards.
Sec. 4.91 [Reserved]
Sec. 4.92 Enforcement and supervisory standards.
(a) Unsafe or unsound practices. For purposes of the OCC's
supervisory and enforcement activities under 12 U.S.C. 1818, 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.
(b) Matters requiring attention. The OCC may only issue a matter
requiring attention to an institution for a practice, act, or failure
to act, alone or together with one or more other practices, acts, or
failures to act, that:
(1)(i) Is contrary to generally accepted standards of prudent
operation; and
(ii)(A) If continued, could reasonably be expected to, under
current or reasonably foreseeable conditions,
(1) Materially harm the financial condition of the institution; or
(2) Present a material risk of loss to the Deposit Insurance Fund;
or
(B) Materially harmed the financial condition of the institution;
or
(2) Is an actual violation of a banking or banking-related law or
regulation.
(c) Clarification regarding supervisory observations. Nothing in
paragraph (b) of this section prevents the OCC from communicating a
suggestion or observation orally or in writing to enhance an
institution's policies, practices, condition, or operations as long as
the communication is not, and is not treated by the OCC in a manner
similar to, a matter requiring attention.
(d) Tailored application required. The OCC will tailor its
supervisory and enforcement actions under 12 U.S.C. 1818 and issuance
of matters requiring attention based on the capital structure,
riskiness, complexity, activities, asset size and any financial risk-
related factor that the OCC deems appropriate. Tailoring required by
this paragraph (d) includes tailoring with respect to the requirements
or expectations set forth in such actions as well as whether, and the
extent to which, such actions are taken.
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Chapter III
Authority and Issuance
For the reasons set out in the preamble, the Board of Directors of
the Federal Deposit Insurance Corporation proposes to add part 305 to
title 12 of the Code of Federal Regulations as follows:
0
3. Add part 305, consisting of Sec. 305.1, to read as follows:
PART 305--ENFORCEMENT AND SUPERVISION STANDARDS
Sec.
305.1 Enforcement and supervision standards.
Authority: 12 U.S.C. 1818, 1819(a) (Seventh, Eighth, and Tenth),
1831p-1.
Sec. 305.1 Enforcement and supervision standards.
(a) Unsafe or unsound practices. For purposes of the FDIC's
supervisory and enforcement activities under 12 U.S.C. 1818, 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.
(b) Matters requiring attention. The FDIC may only issue a matter
requiring attention to an institution for a practice, act, or failure
to act, alone or together with one or more other practices, acts, or
failures to act, that:
(1)(i) Is contrary to generally accepted standards of prudent
operation; and
(ii)(A) If continued, could reasonably be expected to, under
current or reasonably foreseeable conditions,
(1) Materially harm the financial condition of the institution; or
(2) Present a material risk of loss to the Deposit Insurance Fund;
or
(B) Materially harmed the financial condition of the institution;
or
(2) Is an actual violation of a banking or banking-related law or
regulation.
(c) Clarification regarding supervisory observations. Nothing in
paragraph (b) of this section prevents the FDIC from communicating a
suggestion or observation, orally or in writing, to enhance an
institution's policies, practices, condition, or operations as long as
the communication is not, and is not treated by the FDIC in a manner
similar to, a matter requiring attention.
(d) Tailored application required. The FDIC will tailor its
supervisory and enforcement actions under 12 U.S.C. 1818 and issuance
of matters requiring attention based on the capital structure,
riskiness, complexity, activities, asset size and any financial risk-
related factor that the FDIC deems appropriate. Tailoring required by
this paragraph (d) includes tailoring with respect to the requirements
or expectations set forth in such actions as well as whether, and the
extent to which, such actions are taken.
Jonathan V. Gould,
Comptroller of the Currency.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on October 7, 2025.
Jennifer M. Jones,
Deputy Executive Secretary.
[FR Doc. 2025-19711 Filed 10-29-25; 8:45 am]
BILLING CODE 4810-33-6714-01-P