Regulatory Note — Enforcement – OCC Policy on “Persistent Weaknesses”
On May 25, 2023, the OCC published a new policy for enforcement actions involving certain national banks and federal savings associations (collectively, “banks”) that exhibit “persistent weaknesses.” The policy is contained in a new Appendix C to PPM 5310-3, the OCC’s policies and procedures manual on enforcement actions.
The context of Appendix C is worth considering. The appendix is not a sharp break with the past: the OCC has had a longstanding policy for the escalation of enforcement actions when a bank fails to take corrective action promptly. Rather, Appendix C implements part of – but does not go as far as – Acting Comptroller Hsu’s speech in January of this year on “too-big-to- manage” banks. The timing of Appendix C also suggests that it responds to the criticism of the Federal Reserve for its supervision of Silicon Valley Bank (or preemptively responds to potential future criticism of the OCC).
Appendix C contains three elements: the banks that are subject to the new policy, the actions or inactions that will trigger new enforcement actions, and the corrective actions that the OCC will require.
Banks subject to Appendix C. The new policy applies to banks with $50 billion or more in average total consolidated assets as well as to other banks that are “highly complex or otherwise present a heightened risk” that warrant application of the policy. Complexity and heightened risk are a function of a bank’s size, risk profile, complexity of products and services, and the scope of operations. Appendix C does not provide further details on these factors although size, for example, presumably has a threshold below $50 billion. Further, the OCC preserves its discretion to apply the policy to any bank, that is, a bank of any size could present persistent weaknesses as the OCC describes them.
“Persistent weaknesses.” Under the policy, persistent weaknesses exist if, over a three-year (or longer) period, the bank has received composite or management component ratings of 3 or worse, or three or more weak or insufficient quality of risk management assessments. Multiple enforcement actions over a three-year period or the failure to take all the corrective actions required by a formal enforcement action in a timely manner (regardless of the timeframe) also show persistent weaknesses.
Enforcement actions. Appendix C confirms the OCC’s existing escalation policy – formal enforcement actions such as C&D orders and CMPs in the event of continuing deficiencies or failure to correct them. What may be new is that Appendix C describes more onerous enforcement actions that the OCC may take against a bank with persistent weaknesses – where C&Ds and CMPs have failed:
Requirements that a bank’s board of directors over see the development and implementation of an enterprise-wide action plan that will improve the bank’s ratings or the quality of its risk management assessments. Note that, historically, it is not unusual for C&Ds to require board-level corrective action even without persistent weaknesses.
Restrictions on growth, either overall, indiscrete business lines, or in business activities.
Restrictions on the payment of dividends.
Requirements to invest in specific aspects of the bank’s operations or to acquire or hold additional capital or liquidity. Some C&D orders have in the past required a bank to improve its capital ratios even if the bank does not show persistent weaknesses.
Note that Appendix C does not include a further escalation of remedies that the Acting Comptroller described in his January speech. In that speech, the Acting Comptroller discussed a situation in which growth restrictions had been ineffective and a deficiency had still not been remedied. In this event, the OCC would consider “simplification via divestiture” or breaking up the bank. This prospect is absent from Appendix C, but the OCC nevertheless could force such a result.