#community banks

In remarks last week, Secretary Bessent drew attention to a new OCC and FDIC proposal that, among other things, defines what will be considered “unsafe” and “unsound” when it comes to bank examination and enforcement.  As Mr. Bessent said, “While simply defining a term might seem like a small thing, …, a clear focus on material financial risk will put an end to this nonsense.”  By which he meant the egregious supervisory lapses that led to four costly bank failures in 2023.  He’s right, but the banking agencies must also match these new words with far faster, tougher, and transparent supervisory deeds.

There’s no question that supervisory policy has long forced banks to think at least as much about papering decisions as making them.  This is a particular problem for community banks without teams of compliance specialists, adding all too much cost to the technology and product innovations essential to banks that aren’t just safe, but also sound competitors that serve their communities.  Much in the post-2008 rulebook needs a rewrite and almost everything proposed after the 2023 crash is badly designed.

But ripping out too many pages in righteous rage could spark yet another of the downward spirals in lax rules and irresponsible banking that occur every other decade or so.  I thus worry about a few aspects of this new proposal.

For example, the proposal bars supervisory sanction unless or until a material loss is foreseeable or has actually occurred.  Violations of banking or consumer law cannot …