The Treasury Department’s Office of the Comptroller of the Currency (OCC) proposed a rule that would extend requirements for recovery plans to all banks with at least $100 billion in assets.
The proposed rule, published July 3 in the Federal Register, would require approximately 19 additional mid-sized banks to create detailed recovery plans to be implemented during times of severe financial stress or failure.
The OCC’s current recovery planning guidelines apply to large banks with more than $250 billion in assets or to banks with less than $250 billion if they are highly complex or present what the agency considers to be heightened risks.
The OCC is considering expanding the requirements to more banks following the failure of several mid-sized banks in 2023, including Silicon Valley Bank, Signature Bank and First Republic Bank. Acting Comptroller of the Currency Michael Hsu said in a May speech that the banks could have been saved, or at least closed in a more orderly manner, had they had better recovery plans in place.
“The events, coupled with the OCC’s supervisory experience, made clear the importance of ensuring that banks in this 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,” according to the proposed rule.
In addition to changing the threshold to apply to banks with $100 billion or more in assets, the rule would also incorporate a testing standard, “which would aid covered banks in proactively identifying and addressing any weaknesses or deficiencies in their recovery plans before they experience severe stress.” Such testing should be “risk-based and reflect the covered bank’s size, risk profile, activities and complexity,” the proposed rule added.
Some banks are “undergoing rapid and significant changes in an effort to innovate, digitize and meet rising consumer demands; to optimize risk management practices; and to respond to externalities such as economic and environmental uncertainties and financial pressures. These risks can lead to severe non-financial stress that affects a bank’s financial strength and viability,” the proposed rule said. The rule would require banks to clarify the role of nonfinancial risk (including operational and strategic risk) in recovery planning.
Comments on the plan should be submitted to the OCC by Aug. 2.