• Democratic senators urge banking regulators to withdraw a proposed safety rule
• The proposal narrows how unsafe or unsound practices are defined
• Lawmakers warn it could delay intervention until damage is severe
• Regulators argue the change would improve clarity and consistency
• Critics say early warning signals would be ignored
• Large banks could pose systemic risks before action is allowed
• State supervisors also warn about accountability gaps
• Coordination with the Federal Reserve remains a concern

A group of Democratic senators is pressing federal banking regulators to abandon a proposed rule they say would significantly weaken the government’s ability to act early against risky bank behavior.

In a letter sent Thursday, Elizabeth Warren and four Democratic colleagues urged the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency to withdraw a proposal that would narrow how regulators define unsafe or unsound banking practices.

Warren, the ranking member of the Senate Banking Committee, was joined by Richard Blumenthal, Jack Reed, Chris Van Hollen, and Sheldon Whitehouse.

The lawmakers warned that the proposal would constrain regulators’ enforcement authority and make it harder to intervene before problems escalate into threats to financial stability.

According to the letter, the proposed change would effectively limit regulators’ ability to initiate enforcement actions against banks that take excessive risks or operate in a dangerous manner.

The senators argued that the rule would “disarm examiners” by raising the threshold for action and discouraging supervisors from flagging emerging risks early.

The rule, first proposed in October, would redefine an unsafe or unsound practice as conduct that is likely to materially harm a bank’s financial condition or the Deposit Insurance Fund if it continues.

Regulators have emphasized the importance of both likelihood and materiality, signaling that minor or speculative risks would fall outside the definition.

The FDIC and OCC have defended the proposal as a way to provide greater clarity and consistency in supervision.

In the notice of proposed rulemaking, the agencies said a lack of clarity around the term unsafe or unsound has sometimes led to inconsistent application by examiners.

Narrowing the definition, they argued, would allow supervisors and banks to focus resources on the most critical financial risks to institutions and the broader system.

Patrick Haggerty, a partner at financial services advisory firm Klaros Group, said the proposal would effectively raise the bar for enforcement actions tied to safety and soundness concerns.

By emphasizing practices that are likely to cause material harm, regulators would be less able to act on early warning signs that fall short of that threshold.

Democratic lawmakers sharply disagreed, arguing that the proposal would reverse decades of supervisory practice. For years, unsafe or unsound conduct has been interpreted broadly to include actions contrary to prudent banking standards that could expose institutions to abnormal risk of loss if allowed to continue.

That approach, they said, enables regulators to step in before risky behavior becomes entrenched or causes irreversible damage.

The senators also criticized the proposed reliance on the terms likely and material, noting that the agencies did not define either concept or explain how examiners should assess them.

They warned that supervisors could be prevented from addressing risky practices that plausibly lead to severe losses but are difficult to quantify in advance.

In the case of large banks, the emphasis on material harm could be especially dangerous, the lawmakers said.

Waiting until risks reach a scale that is material for a systemically important institution could expose the broader economy to catastrophic consequences.

State regulators have also raised concerns. The Conference of State Bank Supervisors said in a comment letter that any final rule should preserve management accountability when practices pose material harm to banks or customers.

The group also urged coordination with the Federal Reserve, warning that inconsistent standards could emerge if federal agencies move ahead independently.

OCC Comptroller Jonathan Gould previously said the goal of the proposal was to put risk based supervision on firmer footing by hardwiring the definition of unsafe or unsound practices into regulation.

He argued the change would keep supervisors focused on material financial risks rather than overwhelming banks with issues that distract from what matters most.

Lawmakers countered that narrowing supervisory discretion risks repeating past failures, where regulators moved too late to stop practices that later proved destabilizing.