Learn With

The Premier Insights Blog

By Premier Insights

In Industry Updates

Posted September 20, 2018

Agency Statement Regarding Supervisory Guidance and What it May Mean To Your Institution

Agency Statement Regarding Supervisory Guidance and What it May Mean To Your Institution

Banking regulations contain a degree of subjectivity. Regulations are broad and pertain to the entire industry, but institutions can vary significantly in operations and size even within the subsets of rules that apply to each. Practically speaking, this often leaves the examination process subject to interpretation in terms of what is compliant and what is not.

To address these ambiguities, agencies issue and institutions ask for guidance from bank regulators. This can come in the form of statements (as the one discussed here), Q & A’s, webinars, and meetings held by the agencies specifically for institutions. Guidance can even be more specific and may be the result of an examination finding. For example, agencies sometimes offer recommendations post-exam to address any criticisms or perceived deficiencies an institution may have. 

Supervisory guidance is important and essential, but is also somewhat of the proverbial two-edged sword. Before discussing this further, however, let's review the content of the agency statement. 

Agency Statement

The FDIC, the Fed’s Board of Governors, the OCC, the CFPB and National Credit Union Administration have issued a joint statement explaining the role of supervisory guidance. The statement clarifies that supervisory guidance is just that, guidance, and as such, it does not have the force of law.

The FIL can be accessed here: https://www.fdic.gov/news/news/financial/2018/fil18049.pdf

The Distinction between Rule and Guidance

The statement addresses concerns from financial institutions that regulators issue guidance and then enforce it as if it were law. The distinction between guidance and rule is important, but the two are often inextricably linked. Regulations issued as rules through the notice-and-comment process have the force of law. Officially, supervisory guidance is not subject to the same oversight procedure and does not carry the force and effect of law.[1]

Nevertheless, in recent years, failure to comply with supervisory guidance has been used as the basis for supervisory enforcement. This has led to decreased accountability of regulatory bodies and increased uncertainty for financial institutions.

In the statement, the agencies explain that they do not take enforcement actions based on supervisory guidance. Rather, supervisory guidance is meant to provide examples and insight to industry and to promote transparency in the supervisory approach. If financial institutions can once again view supervisory guidance as a guide rather than a rule, then this statement will prove to be an important step toward increased accountability.

Ongoing Efforts to Increase Clarity

The agencies discuss specific practices that will be part of ongoing efforts to clarify the role of supervisory guidance.

  • They intend to limit the use of numerical thresholds and ensure that when numerical thresholds are used, they are used as examples and not requirements.
  • Examiners will not issue citations for “violations” of supervisory guidance but may reference supervisory guidance to provide examples of compliance.
  • The agencies will continue to seek public comment on supervisory guidance and will make efforts to reduce the issuance of multiple supervisory guidance documents on the same subject.

The use of quotation marks around “violations” implies that, in the agencies’ views, there is no such thing as a violation of supervisory guidance. Nevertheless, some observers are concerned that referencing supervisory guidance when identifying unsafe and unsound practices will be a back-door approach to enforcing supervisory guidance.

Practicality & Trade-Offs

There are costs associated with regulatory uncertainty. Financial institutions benefit from clarity and predictability in the supervisory approach and agencies’ transparency on key issues. Therefore, agencies will continue to provide, and banks will continue to demand, guidance from their regulators. It is a necessary part of the industry-agency relationship.

There are, however, obviously trade-offs. Let’s consider a plausible example. Assume that an institution is criticized in an examination for facets of its compliance. The institution has an incentive to not only comply but also maintain a good relationship with their regulator. The agency would generally provide some recommendations to correct the perceived deficiencies. The institution in turn would be interested in what actions could be taken to alleviate the agency’s concerns. 

In the above instance, supervisory guidance would be a positive as long as certain conditions are met. These conditions are that there is at least general agreement between the institution and the agency about the actions that should be taken; the institution feels the expectations are achievable, and the agency remains consistent and clear in these expectations (i.e., the next exam team does not have a different perspective). If these conditions are met, guidance and adherence to the guidance is a win for both the institution and the agency. The institution is provided some certainty and the agency has some comfort that the institution is complying. 

Conversely, if one or more of these conditions are not met, the outcome would be different. If the guidance provided blurred the lines between compliance and non-compliance, the institution did not perceive the expectations as attainable, or the agency perspective changed over time, then the outcome is not positive. 

Summation

Supervisory guidance is essential in the regulatory space and contains both costs and benefits. It is difficult to see a regulatory environment void of guidance from the supervisory agencies. And, to the extent institutions make an effort to and meet such guidance, there is an expectation on the institution’s part that their actions would constitute compliance.  

The agency statement appears intended to provide clarification between law and agency perspectives, but these are so intertwined that it is not possible to fully separate them.  

While some industry critics may see this as a correction to regulatory overreach, there are both pros and cons.  And, the statement may be just that – clarification of an official position which of course is a positive. With the current emphasis to ease the tightening of regulation via Dodd Frank, it may also provide some political cover. In reality, however, for financial institutions, it may be of little practical significance. 


[1] See the Supreme Court decision in Perez vs. Mortgage Bankers Association.


How to cite this blog post (APA Style): 
Premier Insights. (2018, September 20). Agency Statement Regarding Supervisory Guidance and What it May Mean To Your Institution [Blog post]. Retrieved from https://www.premierinsights.com/blog/agency-statement-regarding-supervisory-guidance-and-what-it-may-mean-to-your-institution.


Subscribe to the Premier Insights Blog

Premier Insights

Premier Insights

Premier Insights is an analytical and consulting firm specializing in econometric and statistical analysis for the banking industry, Fair Lending and CRA consulting, and other research and analytical services.

Search Premier Insights

Subscribe to the Premier Insights Blog