OCC's 'Heightened' Supervision Program May Extend to Foreign Branches: Official

WASHINGTON — The U.S. branches of certain foreign banking firms are "informally" being included in a regulatory initiative to beef up supervisory standards for large federally-chartered institutions, a senior official said Monday.

An Office of the Comptroller of the Currency proposal released earlier this year would formalize and refine a set of "heightened expectations" the agency has imposed on large OCC-supervised institutions since 2010. The proposal, for which the agency is now accepting comments, applies to national banks with over $50 billion in assets.

But Charles Taylor, the agency's deputy comptroller for capital and regulatory policy, told the meeting of an international banking group that certain foreign-owned branches not insured by the Federal Deposit Insurance Corp. — which are licensed by the OCC — are being subject to some of the new standards on an informal basis.

"It is important to note that uninsured federal branches, which constitute the vast majority of Federal branches, would not be covered by the proposal," Taylor said in remarks prepared for the Washington meeting of the Institute of International Bankers. "However, the OCC is informally applying certain aspects of heightened expectations to a few uninsured federal branches with highly complex operations or heightened risk, and we expect that to continue."

Taylor, who filled a speaking slot previously scheduled for Comptroller Thomas Curry, also reiterated steps the OCC is taking to complete an independent review of its supervisory programs, and highlighted efforts by OCC-regulated institutions to simplify their legal entity structures.

The "heightened expectations" proposal would compel institutions to ensure that bank boards are exercising their fiduciary duty, define a bank's "acceptable" appetite for risk-taking through a formal written statement and avoid compensation structures that encourage "imprudent" risks, among other standards.

Taylor said some insured federal branches of foreign banks could end up being included as well.

"I should emphasize that the proposed rule applies to any insured OCC-supervised institution with $50 billion or more in assets. This threshold would generally exclude existing insured federal branches of foreign banks," he said. "Nonetheless, the OCC reserves the authority to apply the rules to an … [insured] entity, including a federal branch, irrespective of asset size, if that entity has operations that are highly complex or present heightened risk."

Meanwhile, Taylor also provided an update on how the agency is responding to findings of a group of foreign regulators the OCC had asked to assess the agency's supervision of both large and midsize institutions. The group — which included Singapore, Australia and Canada, and which was headed by former Office of Thrift Supervision Director Jonathan Fiechter — said resident OCC examiners devoted to single institutions should be moved to off-site locations, among other recommendations.

"Two OCC task forces are reviewing the report and developing plans based on its recommendations, so it's hard to predict exactly where they will lead us — except, I am certain, to an even stronger OCC," Taylor said. "Exercises like this, which take advantage of the unique experiences of regulators in other countries and their different approaches to bank oversight, offer the opportunity to strengthen supervision — and the financial system — globally."

He also discussed efforts the largest OCC-supervised institutions are taking to cut through their maze of complex legal structures. Systemically important institutions have been engaged with the FDIC and Federal Reserve Board in a process required under the Dodd-Frank Act to develop so-called "living wills" — or resolution plans meant in part to rationalize firms' legal entity structures while also providing regulators with a wind-down roadmap.

Taylor lauded steps certain institutions have already made to reduce their legal structure complexity, and said it is those banks that have also shown "noticeable progress" in complying with the OCC's heightened expectations program.

"The majority of OCC-supervised banks with complex structures are now engaged in simplification projects, and we are strongly encouraging this process," he said. "We plan to initiate a project soon to compile data that will assist the industry and other regulators in assessing the impact of these actions. We expect this project to provide insight on the impact of legal entity simplification on resolution and recovery planning as well as ongoing risk management."