OCC eases regulatory burden, saves community banks time, money

After raising the community bank asset threshold to $30 billion from $10 billion, the Office of the Comptroller of the Currency (OCC) took steps to reduce the banks' regulatory burden through rule proposals and guidance.

Less frequent and burdensome exams, faster approval timelines for activities such as M&A and branching, and reduced risk model reviews are expected to save community banks time and money, sources told S&P Global Market Intelligence.

The changes are expected to benefit the 866 banks with under $30 billion in assets overseen by the banking watchdog. After raising the community bank threshold to $30 billion, the number of banks that will benefit increased by 16.

The changes will help with the "mental wear and tear of the regulators just leaning on you and holding you, the $2 billion bank, to the same standard as the $100 billion bank," John Gorman, a partner at Luse Gorman PC who advises financial institutions on M&A and regulation, said in an interview. "It just has been making banking more difficult."

Examinations

Under the new OCC examination guidance, examiners can determine the frequency of bank examinations within the statutory 12- to 18-month period. Banks will also see less strenuous exams under the guidance, as it instructs regulators to tailor exams to each bank's business model and risk profile, rather than applying uniform standards and assessments.

For example, the guidance eliminates the requirement for fair lending assessments in every exam cycle and for flood insurance coverage testing every three years.

The examination guidance is significant because it will impact every bank with less than $30 billion in assets overseen by the OCC, said Matthew Bisanz, a bank regulatory partner at law firm Mayer Brown.

Given the high stakes associated with supervisory ratings and potential enforcement actions, banks devote substantial resources to meticulous preparation for frequent examinations. These changes will save banks money, Walt Zalenski, a partner advising banks and others at Orrick Herrington & Sutcliffe LLP, told Market Intelligence in an email.

"At least on occasion, bank examiners reflect an instinct for the capillary rather than the jugular, and that can occupy significant time and attention by bank management and personnel," Zalenski wrote. "More streamlined and tailored exams mean fewer resources expended on the regulatory process and more resources available for running the business."

The guidance also directs examiners to focus on financial risks, a long-running goal of the current federal regulators. The guidance is "a messaging that, 'Hey, listen, we're going to focus on the important stuff and not beat these banks to death over process," Gorman said.

Other changes

Community banks seeking growth through M&A or branch expansions could see faster approvals for these activities. Under a proposed OCC rule, banks with under $30 billion in assets and in good regulatory standing will be eligible for expedited or reduced filing procedures for those applications.

"The beauty of the licensing [guidance] is it's objective," Gorman said. If you are a bank with assets of "$30 billion or less, and you're well-managed and well-capitalized, bingo — you qualify."

In another change expected to save community banks time and money, the OCC clarified that banks will no longer have to validate their risk management models related to underwriting, capital and reserves each year.

Instead, OCC regulations state that models should be reviewed "at some fixed interval," and community banks can choose that interval and tailor it to their own business model and complexity, the guidance said.

Moreover, the guidance said the agency will not give negative supervisory feedback to community banks solely based on the frequency or scope of the bank's model validations.

"My personal view is that the action on model risk management is the most significant given the difficulty that many community banks have in meeting risk management expectations that are more appropriate for the risks presented by larger bank models," Bisanz wrote in an email.

Tailoring the requirements will help community banks, as small banks should not be held to the same exam frequency and other standards as large ones, Gorman said.

"The OCC's clarification that models do not necessarily require annual validation — a task often performed by third parties — also represents a cost saving," Zalenski wrote.