OCC Addresses Banks with Persistent Weaknesses
On May 25, 2023, the Office of the Comptroller of the Currency (OCC) announced revisions made to its Policies and Procedures Manual 5310-3 (PPM)[1]. The updated PPM is intended to address concerns for banks that exhibit, or fail to correct, “persistent weakness.” The PPM now includes “Appendix C: Actions Against Banks with Persistent Weaknesses” to clarify how the OCC determines if a bank has persistent weaknesses and what actions the OCC may take to address them.
The OCC defines persistent weakness as:
Q composite or management component ratings of 3 or worse;
3 or more risk management assessments in which the bank’s practices are considered weak or insufficient for more than 3 years;
“failure by the bank to adopt, implement, and adhere to all the corrective actions required by a formal enforcement action in a timely manner”; or
multiple enforcement actions against the bank executed or outstanding during a 3-year period.
Appendix C generally applies to banks subject to “heightened standards”[2] pursuant to 12 CFR 30, appendix D as well as banks with operations that are deemed by the OCC as “highly complex” or may pose heightened risks. Should the OCC determine a bank exhibits persistent weakness, it may take additional supervisory or enforcement action. In the case of continuing, recurring, or increasing weaknesses, the OCC may take additional or increasingly severe actions, including, but not limited to:
requiring the board of directors for the bank to implement an enterprise-wide action plan to address the persistent weakness, including plans to improve composite or component ratings or quality of risk management assessments;
restricting the bank’s growth, overall or in specific areas, business activities, or payment of dividends; and
requiring the bank to take affirmative actions, such as increasing investments targeted to aspects of its operations or holding additional capital or liquidity.
Additionally, the OCC may, pursuant to 12 USC 1818, bring enforcement actions against “institution-affiliated parties who have engaged in unsafe or unsound practices, violations, or breaches of fiduciary duty, including parties who caused or contributed to the bank’s persistent weaknesses.”
The revisions come just months after the Comptroller of Currency Michael J. Hsu addressed concerns regarding banks becoming “too-big-to-manage” (TBTM) on January 17, 2023. According to Hsu, as banks become “bigger and more complex than ever,” addressing the risks associated with being TBTM will be critical. Well-managed banks embrace the process of identifying and correcting weaknesses rather than allowing matters requiring attention to age, which tends to signal to regulatory bodies that “something is amiss.”
[1] https://www.occ.gov/news-issuances/bulletins/2023/ppm-5310-3.pdf
[2] “Heightened standards” refers to (i) the minimum standards for the design and implementation of a covered bank's risk governance framework and (ii) the minimum standards for the covered bank's board of directors in providing oversight to the risk governance framework and implementation. Covered banks include any bank with (i) total consolidated assets equal to or greater than $50 billion, (ii) average consolidated assets less than $50 billion if the bank’s parent company controls at least one covered bank, or (iii) a bank which the OCC determines has highly complex operation or presents a heightened risk to warrant the application of the heightened standards set forth.