• OCC and FDIC have finalized new standards emphasizing material financial risks
• The rule formally defines unsafe or unsound practices and establishes standards for MRAs
• FDIC is closing many outstanding criticisms that fail to meet the new threshold
• OCC has revised enforcement policies to emphasize proportionality and predictability
• Banking industry representatives welcomed greater supervisory certainty
• Critics warn the reforms could prevent regulators from addressing risks early

The Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. are narrowing the focus of bank supervision to material financial risks, drawing criticism that regulators could lose the ability to intervene before emerging problems become serious.

The agencies issued a final rule formally defining an “unsafe or unsound practice” and establishing consistent standards governing when and how examiners issue matters requiring attention, or MRAs.

Under the framework, supervision and enforcement will focus on practices, actions or failures that, if allowed to continue, would be likely to materially damage an institution’s financial condition or create a material risk of loss to the Deposit Insurance Fund.

The agencies said the changes are intended to shift attention away from nonfinancial concerns involving policies, processes and documentation where those shortcomings do not create material financial risks.

FDIC Chair Travis Hill said the rule “shifts the nature of supervisory criticisms” by directing examiners toward fundamental underlying risks rather than concentrating primarily on how banks manage those risks.

“In combination, the result is that examiners will focus only on issues that can have a material impact on the financial condition of an institution and on actual violations of relevant laws or regulations,” Hill said.

The materiality requirement does not prevent examiners from identifying problems proactively or require them to wait until financial damage has occurred.

However, Hill said the possibility that an activity could materially harm an institution’s financial condition must be “more than speculative or merely possible.”

The shift is already affecting outstanding supervisory findings. Hill said the FDIC has closed or is closing a large majority of criticisms that fail to meet the revised standards, while many findings that do satisfy the threshold will be converted into MRAs.

The OCC has also substantially revised policies and procedures governing enforcement actions and MRAs.

The regulator said the changes emphasize escalation, tailoring and corrective actions specifically targeted at identified deficiencies.

Comptroller of the Currency Jonathan Gould said the reforms would codify the OCC’s “return to risk-based supervision” and help make its approach more durable.

“It is critical that examiners and institutions prioritize material financial risks and substantive violations of law over concerns related to policies, process, documentation, and other nonfinancial risks,” Gould said.

The OCC has separately proposed further changes to MRA standards involving breaches of law, including creating distinct categories for “substantive violations” and “technical violations.”

Banking industry representatives welcomed the changes. American Bankers Association CEO Rob Nichols said the rule would bring greater certainty to examinations while ensuring attention remained focused on material financial risks.

Critics, however, argue that raising the threshold for supervisory intervention could weaken regulators’ ability to tackle excessive risk-taking at an early stage.

Sen. Elizabeth Warren and four other Democratic senators previously urged regulators to abandon the proposal, warning it could “disarm examiners” and prevent supervisors from communicating risks before they develop into larger problems.

University of Michigan associate professor of business law Jeremy Kress also criticized the finalized approach, arguing that it exceeds the agencies’ statutory authority, conflicts with judicial precedent and “undermines effective supervision.”

The disagreement leaves regulators facing a fundamental question over how early supervisors should intervene - and how substantial a potential threat must become before formal supervisory action is justified.