FDIC, OCC Rule Focuses Bank Supervision on Material Harm
A new FDIC and OCC rule defines 'unsafe or unsound' practices based on material financial harm to a bank, but the standard does not apply to enforcement actions against individual officers, directors, or employees.
The FDIC and OCC have finalized a joint rule that, for the first time, codifies a definition for "unsafe or unsound" banking practices. Effective November 2, 2026, the rule requires that a criticized practice, to be actionable, must be likely to cause material financial harm to the institution. This change, long sought by the industry, aims to shift examiners' focus from procedural or compliance-management issues toward core financial risks. The rule also heightens the standard for issuing a "Matter Requiring Attention" (MRA), requiring a reasonable expectation of material harm.
Sophisticated counsel should note a critical exception: the new materiality standard does not apply to enforcement actions against "institution-affiliated parties" (IAPs). This means individual officers, directors, employees, and certain agents remain exposed to personal liability under the pre-existing, broader standard. With regulators recently increasing the proportion of enforcement actions brought against individuals, this bifurcated standard creates a new and complex risk dynamic. Banks should re-evaluate their compliance and governance frameworks to ensure robust controls are in place to protect individuals, as they will not benefit from the institution's higher liability threshold.