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Financial Services Law Insights and Observations

FDIC OIG makes recommendations based on material loss report

Bank Regulatory Federal Issues OIG FDIC

On November 28, the OIG for the FDIC delivered a material loss review report. The report’s objectives were twofold: first, to determine why a bank’s issues led to a material loss to the deposit insurance fund; and second, to review the FDIC’s supervision of the bank and make recommendations to prevent similar losses in the future.

The report outlined 11 recommendations for the FDIC to implement so it can improve its supervision process over the banking sector. The recommendations include: (i) to evaluate if and why banks may wait to issue CAMELS ratings downgrades until they issue a Report of Examination; (ii) to identify whether the training curriculum should be adjusted to emphasize why timely ratings changes are important; (iii) to review FDIC examination guidance to determine if enhancements are necessary to highlight when a bank’s practices do not align with its policies, and make recommendations; (iv) to evaluate and update examination guidance to require supervisory actions when it violates its risk-appetite statement metrics; (v) to comprehensively review the FDIC manual for any updates to the examination guidance pertinent to evaluating the stability of uninsured deposits; (vi) to comprehensively review the FDIC manual to determine if any updates are required to the examination guidance pertinent to banks’ deposit outflow assumptions for liquidity stress testing; (vii) to revisit examination guidance to determine if any updates are required for monitoring other banks, horizontally, for similar risk characteristics; (viii) to revisit examination guidance to determine if any updates are required regarding incorporating shared risk characteristics that lead to risk in the FDIC’s supervisory approach; (ix) to explore research methods to monitor large bank reputational risk; (x) to evaluate if Chief Risk Officers should place more consideration on unrealized losses and declines in fair value; and (xi) to work with other federal regulators on evaluating necessary rule changes, such as the adoption of noncapital triggers.