On September 2, 2014, the Office of the Comptroller of the Currency (“OCC”) finalized its risk governance framework for large banks and thrifts (“Guidelines”) that was proposed in January 2014. The Guidelines formalize the heightened risk management standards that the OCC has been communicating through the supervisory process for several years, but do so somewhat more flexibly than the January proposal (“proposal”) did. Although many firms have been working to enhance their risk management programs to meet the proposal and supervisory communications, most still have work to do in order to meet the Guidelines’ requirements.
The Guidelines maintain the proposal’s emphasis on risk governance at the bank level to ensure safety and soundness, and affords the OCC greater flexibility (prescribed under regulations) to take enforcement actions in response to a bank’s compliance failure. The responsibility to oversee risk management remains with the Board of Directors which retains its ultimate risk governance oversight role; however, the Guidelines clarify that the Board need not take on responsibility for day-to-day managerial duties as the proposal had suggested.
Two other key changes since the proposal bring the Guidelines closer to common industry practices and afford a measure of flexibility to banks. First, the Guidelines narrow the proposal’s definition of a front (or “first”) line unit within the “three lines of defense,” thus bringing fewer support organizational units or functions into the first line (which would subject them to the Guidelines’ requirements for first line units). Second, although the Guidelines maintain the stringent requirements that a bank must meet in order to adopt its parent Bank Holding Company’s (“BHC”) Risk Governance Framework wholesale (including a 95% asset similarity test which, under our analysis, no bank meets), banks now have more flexibility in leveraging their parent BHC’s resources in other ways.
This Regulatory Brief analyzes these two areas where the Guidelines provide more flexibility than the proposal, and provides our view of what firms should be doing now.