The FDIC board today voted to advance two proposed rules to formally define “unsafe and unsound practices” and to remove reputational risk from bank supervision.
There currently is no statutory or regulatory definition of what constitutes an “unsafe or unsound practice,” and courts and administrative tribunals have provided different definitions of the term, according to the FDIC staff memo. The proposed rule would define an unsafe and unsound practice as something that is “contrary to generally accepted standards of prudent operation,” and is likely to materially harm the bank or present a material risk of loss to the Deposit Insurance Fund.
In explaining the need for the definition, FDIC Acting Chairman Travis Hill pointed to the 2023 failure of Silicon Valley Bank, where most of the outstanding supervisory criticisms “were unrelated to core financial risks.”
“It is important that supervisors have the capacity to identify problems and require remediation before it is too late,” Hill said. “But today, too often, examiners focus on a litany of process-related items that are unrelated to a bank’s current or future financial condition.”
The proposed rule to eliminate reputational risk from supervision — issued jointly with the Office of the Comptroller of the Currency — would codify a change that the agencies’ leaders have already instructed supervisors to make. It comes amid a Trump administration push to weed out policies that allegedly encouraged regulators to discriminate against cryptocurrency and other industries.
In a staff memo, the FDIC said banking agencies never explained how banks should measure the reputation risk from different activities. “Without clear standards, the agencies’ supervision for reputation risk has been inconsistent and has at times reflected individual perspectives rather than data-driven conclusions,” the agency said.
After the votes, American Bankers Association President and CEO Rob Nichols said ABA welcomed the proposed rules and will review them with its members.
“For too long, bank supervision has shifted away from focusing on the most important factors affecting safety and soundness — a shift that has had negative consequences for banks, their customers and the broader economy,” Nichols said. “That is finally beginning to change thanks to new leadership at the regulatory agencies.”
