Heightened Governance and Risk Standards Proposed for Big Banks

The Office of the Comptroller of the Currency has proposed new requirements for improving governance and risk management standards at big banks.

Following the financial crisis, the OCC developed a set of “heightened expectations” to strengthen these specific areas and enhance its supervision. The proposed guidelines detail the minimum standards for the design and implementation of an institution's risk governance framework and provide minimum standards for oversight of that framework by the board of directors. The changes, made public on Thursday, include:

Increased oversight of the roles and responsibilities of bank personnel responsible for the design and implementation of the risk governance framework, specifically independent risk management, and internal audit.

Requiring a “comprehensive written statement that articulates the bank's risk appetite” that serves as a basis for its risk governance framework. This statement should include both qualitative components and quantitative limits.

Board of directors' oversight of a bank's compliance with safe and sound banking practice  should ensure that the bank establishes and implements an effective risk governance framework that complies with the guidelines.

Active board oversight of a bank's risk-taking activities should establishing accountability for management's adherence to the risk governance framework. The board should also evaluate management's recommendations and decisions by questioning, challenging, and, when necessary, opposing, management proposals that could lead to excessive risk taking or pose a threat to safety and soundness.

A board of directors should have at least two independent members who are not part of the bank's or the parent company's management.

“The standards announced today build on lessons learned from the financial crisis,” said Comptroller of the Currency Thomas Curry in a statement. “They will contribute to a safer financial system for all of us by providing clear and enforceable standards for the risk management and governance of our largest institutions. They provide additional supervisory tools to examiners of large national banks and federal savings associations, and they will measurably enhance our supervision of these institutions.”

The proposed standards would apply to any insured national bank, insured federal savings association, or insured federal branch of a foreign bank, with average total consolidated assets of $50 billion or more. The OCC has the authority to apply the guidelines to an institution with less than $50 billion in assets by determining it is highly complex or presents a heightened risk.

The OCC is proposing these guidelines pursuant to the Federal Deposit Insurance Act, which authorizes it to prescribe safety and soundness standards in the form of a regulation or guidelines. If a bank fails to meet an established standard, it may require the institution to submit a plan specifying the steps it will take to comply with the standard. The agency may also issue an enforceable order if the institution, after being notified that it is in violation of a safety and soundness standard, fails to submit an acceptable compliance plan or fails materially to comply with an OCC-approved plan.