How the OCC Will Change its 'Heightened Expectations' Proposal

WASHINGTON — The Office of the Comptroller of the Currency is likely to make changes to its proposal outlining the "heightened expectations" the largest banks must face after the industry raised concerns that certain provisions could backfire.

While exact details of what it will alter are unclear, observers expect the agency to ease the requirements on banks' board of directors and clarify language that suggested it could apply the tougher standards to smaller institutions.

"The OCC will probably do some adjusting but I don't expect they will throw all the cards in the air and come up with something dramatically different," said Julie Williams, a managing director and head of the domestic advisory practice at Promontory Financial Group, and the OCC's former chief counsel. "For example, the way some of the risk management roles and functions were structured were very rigid and even counterproductive."

Comptroller Thomas Curry hinted at some of the changes in a speech to community bankers last week, spending much of his time trying to reassure nervous executives that the OCC did not intend for the requirements to trickle down to institutions with less than $50 billion of assets.

Under the proposal issued in January, banks above that mark would face a new set of requirements governing everything from risk management procedures to how boards of directors should interact with management.

But the agency reserved the right to apply those standards to smaller institutions if it believes it is highly complex. Some bankers have pressed for that language to be removed, saying it could be used as justification by examiners to force community banks to comply with the tougher measures.

"Some community bankers may be reading that language as a loophole that we will use to impose onerous new requirements on community banks. I want to assure you that this is not the case and not our intent," Curry said before the American Bankers Association's risk management forum in Orlando on April 10. "I can promise that we will consider all the feedback we have received on this and other aspects of our proposal and make any necessary adjustments before the document goes final."

While it's unclear if the OCC will remove the provision altogether, some observers said they expect the agency to clarify that there will not be a "trickle down" effect.

 "Given the strength of that statement, one would expect there to be some tweaking of the language to give further comfort in the rule itself to community banks," said Joseph Vitale, a partner in the bank regulatory practice at Schulte Roth & Zabel. "Making the intent Curry espoused explicit in the rule would ensure that such intent will permeate the entire agency and not leave the issue open to different interpretations by exam staff in the future."

The OCC would not comment on proposed guidance because it has not been finalized. Still, Robert Garsson, the agency's top spokesman, said the proposal "is a large bank issue and not intended in any way to apply to community institution."

"We take the comments we receive very seriously and use them as a way of determining whether the rule will meet the objectives that we set out," he said.

Observers also noted a difference in how Curry discussed requirements facing bank boards. In his speech, he said boards should "actively oversee" institutions with regard to safety and soundness. But the proposal calls on boards to "ensure" institutions are complying with safety and soundness mandates. Industry representatives have been seeking clarification from the OCC on how far boards had to go to "ensure" compliance, as well as on related language that said board should "challenge" management.

When "the proposal says that a bank board of directors must 'ensure' that its bank implement an effective risk governance framework, that forces the boards to consider more than just being a board exercising its traditional oversight function," said David Baris, a partner at BuckleySandler and executive director of the American Association of Bank Directors. "So what the proposed rule is saying is that the boards are responsible for results and by doing that, it forces boards to get involved in wearing management hats... and it may make bank directors feel more overburdened and vulnerable to enforcement actions and personal liability."

Though regulators have increased responsibilities for board directors in recent years, the industry was surprised by the level of detailed requirements that the OCC's plan envisions. Large bank boards would need at least two, trained independent directors under the plan.

But many observers fear that unless the OCC adds more clarity or dials back the requirements, those candidates most skilled to qualify as an independent director would chose not to due to the potential regulatory liability faced as a result of the proposal.

"I hope there would be greater clarity put on the OCC's expectations with regard to directors, in particular independent directors because as it is currently written, it could very well have a chilling effect on their willingness to serve on a bank board," Vitale said.

Last week the American Association of Bank Directors released a survey indicating that nearly 25% of bank respondents said in the past five years they have either lost a director on its board or loan committee; or were refused by a candidate — all over fear of personal liability.

Williams said it's possible the OCC will dial back some of the requirements in order to make it easier for banks to obtain independent board members.

"There's a balance that the OCC has to figure out in terms of how to advocate the diligence and proactivity of directors that they want to see, without suggesting that there is a new source of potential liability for them," Williams said. "If the agency isn't clear on that distinction, it will be a disincentive to get the very kind of qualified directors that you need to accomplish the high-quality risk management that they want."