OCC, FDIC Finalize Rule Defining Unsafe or Unsound Practices, Narrowing MRA Focus

The OCC and the FDIC adopted a final rule creating a uniform definition of "unsafe or unsound practice" and narrowing Matters Requiring Attention ("MRAs") to focus on material financial risks.

Under the final rule (see prior coverage), an "unsafe or unsound practice" is one contrary to generally accepted standards of prudent operation that, if continued, is likely to materially harm the institution's financial condition or pose a material risk of loss to the Deposit Insurance Fund ("DIF"), or that has already materially harmed the institution's financial condition. This definition does not apply to enforcement actions against institution-affiliated parties.

Examiners may issue an MRA only for a practice contrary to prudent standards that, if continued, could reasonably be expected to materially harm the institution or the DIF, or that has already done so, or that is an actual violation of a banking or banking-related law or regulation. Examiners may still issue non-binding "supervisory observations" for lesser weaknesses, which need not be presented to the board and require no corrective action. The agencies intend to use supervisory discretion so MRAs are reserved for "substantive" violations, with lesser violations cited without one. Supervisory activities, enforcement actions, and MRAs must be tailored to an institution's capital structure, complexity, activities, and asset size, with materiality thresholds falling and remediation demands rising as risk increases.

To implement the change, the OCC revised its enforcement action and MRA manuals, committing generally to give banks a chance to remediate before pursuing enforcement. The FDIC is discontinuing Matters Requiring Board Attention and Supervisory Recommendations, redesignating them as MRAs or closing them out.

Each agency's rule applies to the institutions it supervises. Both take effect 60 days after Federal Register publication.