On June 24, 2024, the Office of the Comptroller of the Currency (the “OCC”) issued a notice of proposed rulemaking (the “Proposal”) that would amend its recovery planning guidelines for large insured banks under OCC oversight (i.e., national banks, federal savings banks and federal branches). Comments are due on the Proposal 30 days after the date of publication in the Federal Register.
The Proposal would implement three main changes:
- Expand the “banks” (for these purposes, insured national bank, insured Federal savings association or insured Federal branch of a foreign bank) subject to the OCC’s current guidelines from those with average total consolidated assets equal to or greater than $250 billion (over a four-quarter period) to those with average total consolidated assets equal to or greater than $100 billion;
- Require banks to test their recovery plan at least annually; and
- Emphasize more on non-financial factors, like operational and strategic risk.
This article first provides background and then discusses each element in turn.
Background
The OCC’s recovery guidelines require banks to develop and maintain a recovery plan appropriate for the bank’s “individual size, risk profile, activities, and complexity, including the complexity of its organizational and legal entity structure.”[1] Recovery plans focus on events (“triggers”) that could indicate upcoming severe stress to an institution and the remedial measures (“options for recovery”) that the institution can undertake to address vulnerabilities to internal and external stress scenarios and recover its financial strength and viability (without relying on extraordinary government support).
Recovery planning is often described in combination with the better-known resolution planning requirements for large financial institutions. Whereas resolution planning is focused on mitigating the risk to the markets’ financial stability when an institution fails and needs to be imminently liquidated or resolved, recovery planning seeks to avoid failure altogether by having a playbook to address stress situations and how the institution will respond. For this reason, the OCC may use compliance with the recovery plan guidelines as a proxy for the bank’s resiliency. This was proposed, for example, as part of the OCC’s proposed rulemaking on “Business Combinations Under the Bank Merger Act.”[2]
According to the Proposal, the intent to expand the scope of the recovery planning guidance is largely a response to the bank failures in the spring of 2023.
Proposed Changes
Scope. The Proposal would expand the application of the OCC’s recovery guidelines to banks with average total consolidated assets equal to or greater than $100 billion. The current guidelines (12 CFR 30, Appendix E) generally apply only to banks with average total consolidated assets equal to or greater than $250 billion, representing a significant expansion of the scope of the guidelines. This proposed expansion was previewed in a speech by Acting Comptroller of the Currency Michael J. Hsu in May.[3]
The expanded scope would bring the recovery guidelines closer to their original formulation, which applied to banks with $50 billion or more in average total consolidated assets before being raised to $250 billion in 2018. As noted above, $100 billion was chosen because many of the bank failures in the spring of 2023 involved banks with between $100 billion and $250 billion in average total consolidated assets.[4]
The Proposal would add language clarifying that “average total consolidated assets” should be calculated based on the “total asset” line of a bank’s Consolidated Reports of Condition and Income, not the “average total consolidated assets” line. Average total consolidated assets would be “the average of total consolidated assets of the bank or the covered bank, as reported on the bank’s or the covered bank’s Consolidated Reports of Condition and Income for the four most recent consecutive quarters.”
Testing. The Proposal would add a new requirement that a bank test its recovery plan “periodically but not less than annually.” The test is meant to validate the effectiveness of the plan, and the bank would be required to revise the plan, as appropriate, based on the results of the test. Each element of a recovery plan would need to be tested as part of the annual review. However, the OCC specifies in the Proposal that banks have flexibility in deciding which triggers and options to test and should make a risk-based decision.
While the guidelines themselves do not give specific guidance on designing or conducting the tests, the Proposal states that testing would need to be “risk-based and reflect the covered bank’s size, risk profile, activities, and complexity.” A test may include simulating financial and non-financial stress scenarios to confirm the plan is working as intended. Examples the Proposal provides are (i) testing to ensure plan triggers appropriately reflect the particular vulnerabilities of the bank and would provide timely notice of severe stress (or the likely occurrence of severe stress); and (ii) testing to verify that the bank’s identified options for recovery are credible and that the bank is adequately prepared to carry the option out during severe stress.
Non-Financial Risk. The Proposal would add provisions related to non-financial risk in a number of places throughout the guidelines. This change is meant to emphasize the OCC’s view that non-financial risks, like operational and strategic risks, also can affect a bank’s financial strength and viability. Examples of non-financial stress include (i) undergoing rapid and significant changes to innovate the bank, (ii) optimizing risk management and (iii) responding to externalities (e.g., environmental uncertainties).
Compliance Timing. Banks currently subject to the rule (those with $250 billion in total average consolidated assets) would be required to comply with the changes 12 months after the effective date of the rule. Until then, they are bound by the current guidelines.
Banks not currently subject to the rule (those with $100–$250 billion in total average consolidated assets) would be required to comply with the entirety of the resolution planning guidelines, other than the testing requirement, 12 months after the effective date of the rule. Such banks would be required to comply with the testing requirement 18 months after the effective date of the rule.
Takeaways
The Proposal represents another step in tearing back the 2018 tailoring changes in response to the bank failures in the spring of 2023, a trend that is likely to continue. Given the time it may take to put together a recovery plan, banks with at least $100 billion in average total consolidated assets should consider the steps they would need to take to draft a plan, especially given the other recent rules such banks may have to comply with (e.g., the recent FDIC amendment of its IDI resolution plan rule) and others in the pipeline (e.g., Basel III endgame).
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[1] Michael J. Hsu, “Mitigating TBTF With Recovery Planning,” Remarks at Entrepreneurship, Markets and Technology: Regulation’s Challenges in a Changing World Conference (May 27, 2024), available here.
[2] 89 Fed. Reg. 10010, 10017 (Feb. 13, 2024) (“The OCC’s review of the financial stability factors will consider the impact of the proposed transaction in light of…Standards requirements applicable to the resulting institution’s recovery planning pursuant to 12 CFR 30, appendix E”).
[3] Michael J. Hsu, “Mitigating TBTF With Recovery Planning”; See our discussion of the speech here.
[4] Interestingly, the OCC was not the primary regulator for any of the banks that failed in the spring of 2023.
