On September 24, the Fed issued an updated Statement of Supervisory Operating Principles, superseding the April 21 version (previously covered by InfoBytes here). The update reflects preliminary findings from an independent review of the 2023 failure of a California state-chartered commercial bank (previously covered by InfoBytes here), as well as other feedback from the public and supervisory staff. Citing the review’s finding of a “long-standing culture of excessive risk aversion and indecision,” the Fed said it will not criticize staff for reasonable, good-faith mistakes. Examination teams will also be asked to report regularly to Reserve Bank leaders on issues where they are unsure whether the standard for action is met. Whereas the April version told examiners to focus on firms’ “material financial risks,” the statement now directs them to prioritize risks posing a “significant probability of significant harm” to a firm’s financial condition, other firms, the Deposit Insurance Fund, the firm’s resolvability or U.S. financial stability. It retains the caution against devoting excessive attention to processes, procedures and documentation that pose no significant risk.

The statement also applies the same standard to matters requiring attention (MRAs) and matters requiring immediate attention (MRIAs), dropping the April version’s focus solely on harm to the firm itself. It now covers financial or nonfinancial deficiencies that would create, or have already caused, significant harm to any of the categories listed above. The update also removes the April version’s two quantitative tests that would “clearly be sufficient” to establish significant harm. Until tools exist to reliably estimate probability, sufficient evidence that significant harm is “plausible” now satisfies the probability standard. The Fed said staff are not currently required to use any quantitative indicator and that cases in which probability or severity is unclear should be escalated up the management chain for review. Finally, the statement directs examiners to consider terminating enforcement actions once the firm has substantially complied with their requirements and, if necessary, replacing them with an MRA or MRIA. In conjunction with this update, the Fed will amend SR 13-13 to reinstate supervisory observations.