OCC-supervised institutions with $100 billion or more in average total consolidated assets must be adequately prepared to mitigate severe financial and non-financial risks.

On July 3, 2024, the Office of the Comptroller of the Currency (OCC) issued a proposal (the Proposal) to revise its enforceable recovery planning guidelines¹ (the Guidelines) for certain large insured national banks, insured federal savings associations, and insured federal branches of non-US banks (together, covered banks). The revisions to Appendix E of 12 CFR Part 30 (Banks and Banking, Safety and Soundness Standards) aim to:

1. expand the applicability of recovery planning guidelines to covered banks with over $100 billion in average total consolidated assets;
2. incorporate a testing standard for recovery plans; and
3. include non-financial risks, such as operational and strategic risks, in recovery planning.

The Guidelines, first issued in September 2016, originally established standards for recovery planning by covered banks with average total consolidated assets of $50 billion or more. However, the Guidelines were amended in 2018 to apply to covered banks with average total consolidated assets of at least $250 billion.

The recovery plan standards set forth the responsibilities of a covered bank’s management and board with respect to such bank’s recovery plan. They require that recovery plans include or address:

• quantitative or qualitative indicators of the risk or existence of severe stress that reflect the covered bank’s particular vulnerabilities;
• credible options that the covered bank could undertake in response to the stress to restore its financial strength and viability;
• an assessment and description of how these options would affect the covered bank;
• the covered bank’s overall organizational and legal entity structure;
• responsibilities of management and the board with respect to the covered bank’s recovery plan;
• procedures for escalating decision-making to senior management or the board;
• management reports;
• communication procedures; and
• any other information the OCC communicates in writing.

New Testing Standard

The OCC is proposing to revise the Guidelines to include a testing provision, as the OCC believes testing would:

• aid covered banks in proactively identifying and addressing any weaknesses or deficiencies in their recovery plans before they experience severe stress;
• help ensure that a covered bank’s recovery plan will be an effective tool that can restore the bank to financial strength and viability in response to severe stress; and
• enable management and the board to verify that the covered bank has identified credible options and is adequately prepared to carry out these options, as needed, during a period of severe stress.

Under the proposed testing provision, a covered bank would be expected to test its overall recovery plan as well as each element of the plan. The Proposal does not prescribe a specific testing format or methodology, but testing (such as by simulating severe financial and non-financial stress scenarios) should be risk-based and reflect the covered bank’s size, risk profile, vulnerabilities, activities, and complexity. The OCC would expect that a covered bank test its recovery plan periodically, but at minimum once annually, with risk-based flexibility on the scope of testing. If testing reveals weaknesses or deficiencies in a covered bank’s recovery plan, the bank is expected under the Proposal to revise its recovery plan following testing.

Increased Attention on Non-financial Risks

The OCC is proposing to revise the Guidelines further to include a requirement that covered banks address non-financial risks (e.g., operational and strategic risks) in their recovery plans, by identifying, understanding, and planning for the mitigation of stress factors and triggers that are not inherently financial (e.g., profitability, funding sources, liquidity ratios, and capital ratios). According to the OCC, severe stress resulting from non-financial risks can ultimately affect a covered bank’s financial strength and viability.

Compliance

Covered banks would have 12 months from the effective date of the amendments to comply with the changes in the Proposal, but would still be required to comply with the Guidelines in their current form during the interim period.

Conclusion

The Proposal is another effort by federal banking regulators to apply more stringent standards to banks in the $100-250 billion range following the spring 2023 banking crisis that saw the collapse of several banks in this asset range (for more information, see this Latham Report). The Proposal closely follows the Federal Deposit Insurance Corporation’s (FDIC’s) final rule to expand its resolution plan regulations for insured depository institutions with $50 billion to less than $100 billion in average total assets (for more information, see this Latham blog post).

The OCC noted in the Proposal that it had raised the threshold for the original guidance from $50 billion to $250 billion in 2018. It also expressed its view that the 2023 banking crisis may have been averted if certain institutions not covered by the guidance had developed and maintained comprehensive recovery plans. The OCC thus emphasized “the importance of ensuring that banks in [the $100 billion or more in assets] size range are adequately prepared and have developed a plan to respond to the financial effects of severe stress, particularly in light of the contagion effects and systemic risks they may pose.”

The public comment period on all aspects of the Proposal is open for 30 days from the date of publication in the Federal Register, and comments must be received by August 2, 2024.

1. The OCC issued the recovery plan guidelines pursuant to Section 39 of the Federal Deposit Insurance Act. The OCC may take enforcement action under Section 39 and Appendix E “independently of, in conjunction with, or in addition to any other enforcement action available to the OCC.”