Yesterday, the Federal banking agencies issued final rules that permanently extend the examination cycle, from 12 months to 18 months, for well-capitalized and well-managed banks, savings associations, and Federal agencies and branches of foreign banks with less than $1.0 billion in total assets.

The final rules, which implement a Congressional mandate under a 2015 statute, are identical to interim final rules issued on February 29, 2016.  Prior to February, only firms with less than $500 million in total assets were eligible for the extended examination cycle.

To qualify for the extended 18-month cycle for full-scope on-site examinations, institutions must:

  • have total assets of less than $1.0 billion;
  • not have been subject to a recent change in control;
  • be “well capitalized,” which generally means, among other things, maintaining total risk-based capital of at least 10.0%, tier 1 risk-based capital of at least 6.0%, and a leverage ratio of at least 5.0%; and
  • be well managed, which generally means having a CAMELS management and composite rating of 1 or 2 and not being subject to a formal enforcement proceeding or order.

The agencies retain the discretion to subject otherwise qualifying banks to more frequent inspections.

While the rules do not expressly permit the agencies to keep banks on an 18-month cycle notwithstanding the existence an enforcement action or order, the agencies could nonetheless elect to do so.  Historically, for example, and with some recent and notable exceptions, the OCC has permitted banks subject to enforcement actions or orders to retain their status as “well capitalized” even though the requirements for “well capitalized” status in 12 C.F.R. § 6.4 include a requirement that the bank not be subject to “any written agreement, order or capital directive, or prompt corrective action directive.”

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Photo of Nikhil Gore Nikhil Gore

A member of the international arbitration and financial institutions practices, Nikhil V. Gore represents sovereign states and U.S. and global firms in international treaty-based and commercial disputes. He also regularly represents U.S. financial institutions, and the U.S. branches and affiliates of foreign financial…

A member of the international arbitration and financial institutions practices, Nikhil V. Gore represents sovereign states and U.S. and global firms in international treaty-based and commercial disputes. He also regularly represents U.S. financial institutions, and the U.S. branches and affiliates of foreign financial institutions, in investigations and inquiries involving the Federal Reserve, OCC, FDIC, CFPB, and state banking regulators.

Mr. Gore has served as counsel in investment and commercial arbitrations spanning several industries and a variety of regions, including Asia, Eastern Europe, North America, and Southern Africa. Additionally, he has expertise in the law of the sea, and was part of the Covington team that secured an order from the International Tribunal for the Law of the Sea, which required Russia to release three Ukrainian naval vessels and twenty-four servicemen detained in the Black Sea in 2018.

In his financial institutions practice, Mr. Gore has experience with enforcement actions and investigations relating to the Bank Secrecy Act, the federal criminal money laundering statutes, the full range of safety and soundness issues (including, in particular, supervisory reviews of bank control functions), and fair lending and consumer compliance. Mr. Gore is a regular contributor to the firm’s financial services blog.