The regulatory landscape of the banking industry continues to dramatically shift, as federal agencies adjust previous guidance on bank requirements to avoid “too-big-to-fail” scenarios. This now includes the Office of the Comptroller of the Currency (OCC).
Since 2016, the OCC has overseen the recovery planning of covered banks under 12 CFR Part 30. According to the OCC Handbook, a recovery plan “is a plan that identifies triggers and options for responding to a wide range of severe internal and external stress scenarios to restore a covered bank to financial strength and viability in a timely manner.” The Handbook defines “recovery” as “timely and appropriate action that a covered bank takes to remain a going concern when it is experiencing or is likely to experience considerable financial or operational stress.”
Per the Handbook, “a covered bank in recovery has not yet deteriorated to the point when liquidation or resolution is imminent.” As such, a recovery plan should include measures—referred to as options or recovery options—to reduce the risk to the covered bank’s financial strength and viability once a trigger is breached. In addition, a major underlying principle is that a covered bank may not rely on the assumption of governmental support in its recovery plan.
The initial threshold for recovery planning requirements was set at consolidated assets of $50 billion before increasing to $250 billion in 2018 under the Economic Growth, Regulatory Relief, and Consumer Protection Act. This relief was granted due to the prevailing belief that only the larger, more interconnected banks posed systemic risk. This was a significant rollback of 2008 financial-crisis-era regulations and was seemingly justifiable given all the work that had been done to shore up the financial system post-2008. However, during the 2023 regional bank failures, it was noted that core capabilities that enable a financial institution (FI) to recover from a severely adverse scenario may have atrophied among regional banks, prompting a review of current guidance.
In lockstep with other supervisory bodies, the OCC appears to be walking back the relief it granted in 2018 by proposing lowering the threshold for recovery planning requirements to $100 billion, thereby ensnaring all category IV banks in the process, just as the FDIC also has stepped up its requirements for this cohort group. In June 2024, the OCC put forth significant amendments to 12 CFR Part 30, marking a decisive step toward reinforcing the robustness and stability of national banks and federal savings associations. However, the implications of this updated guidance remain to be seen, as banks find themselves scrambling to adjust to the new expectations.
What’s Changing?
The proposed modifications from the OCC are concentrated on three principal areas: Covered Bank Threshold, Testing, and Non-Financial Risk. The OCC’s concentration on these specific areas aims to fortify the robustness of the banking industry. This ensures that banks are thoroughly equipped to handle diverse stress situations, which in turn supports the overall stability of the financial system.
| Area | Summary |
|---|---|
| Covered Bank Threshold | The guidelines will broaden their reach to include institutions with consolidated assets of $100 billion or more |
| Testing Standard | The establishment of a new testing benchmark for evaluating recovery plans aims to improve their overall effectiveness |
| Non-Financial Risk | A heightened focus on operational and strategic risks within recovery planning, aiming to fortify the sector’s resilience and risk management capabilities |
Impact on FIs
Much of the proposal is thematically similar to that of the finalized insured depository institution (IDI) rule 12 CFR 360.10, which becomes effective on October 1, 2024, particularly in its emphasis on capabilities testing and understanding non-financial risks. This parallel focus is likely to place further strain on current assurance frameworks and governance models that are still reeling from the passing of the final IDI rule and feedback on 2023 Section 165(d) plan submissions, which alluded to the higher standard that will be forthcoming. The following is a summary of key impacts from the OCC’s proposed modifications:
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Covered Bank ThresholdExpansion of Scope: The regulatory framework has been extended to encompass a wider range of FIs, now including insured national banks, federal savings associations, and federal branches having average total consolidated assets exceeding $100 billion.
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Testing StandardStandardized Testing Requirements: The new guidelines introduce a standardized testing protocol for recovery plans. The objective is to uncover any potential weaknesses and affirm the institutions’ ability to respond effectively, thereby enhancing the robustness of their recovery frameworks. Given the focus of the assurance framework in IDI and 165(d), FIs should consider a coordinated approach to testing which can find economies of scale in addressing like capabilities across Recovery, 165(d), and IDI in one exercise.
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Non-Financial RiskEmphasis on Operational and Strategic Risks: The modifications place greater focus on non-financial risks, such as operational and strategic risks. This proactive stance is aimed at mitigating vulnerabilities that are not easily quantifiable and could have profound effects on an FI’s stability and ability to recover from adverse events.
Clear Line of Sight for Recovery & Resolution Planning
There are specific actions FIs should consider taking now to be compliant with the OCC’s proposed modifications:
- Gap Analysis: Perform a gap analysis to understand how the bank’s current recovery planning and risk management measures stack up against the new proposal.
- Ownership Assignment: Clearly assign responsibility for the oversight and execution of recovery plans.
- Regular Updates: Stay updated on any amendments to the regulation and adjust the compliance and risk management strategies accordingly.
FIs impacted by the OCC’s proposal should assess its requirements in conjunction with both the final IDI rule and §165(d). While each has a different mandate, the burdens it places on specific groups such as program management offices and assurance are similar in nature, and a holistic review may provide insights into how an organization should be structured and staffed for success. Although these rules are a dramatic shift from recent regulatory burdens, the clawback of relief is very reminiscent of the post-2008 financial crisis, and FIs may find that the staffing models of the past may provide much needed insight for the immediate future.
For more information on the topic of resolution planning, please view these other FORsights™ articles:
- The Road Ahead: An Overview of the Final IDI Requirements
- Show, Don’t Tell: A Look at Proposed IDI Resolution Plan Requirements
If you have any questions or need assistance, please reach out to a professional at Forvis Mazars.