Common Sense is Making a Comeback: A December to Remember at the FDIC
By Byron Earnheart
I’ve been around this industry long enough to know that when a regulator says they are here to “help,” most community bankers instinctively reach for their Tylenol. For the last few years, it’s felt like we’ve been trying to run a marathon with a backpack full of bricks—each brick labeled with some new, vague process requirement or an asset threshold that hasn’t been touched since the flip-phone era.
But friends, keep your eyes on the headlines from December 11. FDIC Acting Chairman Travis Hill stepped up to the FSOC microphone and delivered a statement that sounded a lot more like a breath of fresh air and a lot less like a typical DC lecture.
Moving the Goalposts (In a Good Way)
The biggest news for those of you trying to manage a balance sheet in this inflationary environment is the long-overdue adjustment of regulatory thresholds. For decades, these numbers have stayed static while the value of a dollar—and the size of our “small” banks—has shifted.
Starting January 1, the FDIC is raising and indexing 37 different asset-based thresholds. The most impactful? The Annual Independent Audit requirement is jumping from $500 million to $1 billion, and the Internal Control (ICFR) assessment is moving from $1 billion to $5 billion.
Think about that. We’ve got nearly 800 institutions that can suddenly stop spending six-figure sums on external audit “gotchas” and start reinvesting that capital back into their local communities. It’s not just about the money; it’s about the predictability. By indexing these to inflation, the FDIC is finally acknowledging that growth shouldn’t be punished by a sudden, massive compliance tax.
Finally, Some Due Process
If you’ve ever sat through an exit interview feeling like the examiner’s “managerial judgment” was more of a “personal opinion,” the new Office of Supervisory Appeals (OSA) is for you.
Chairman Hill is replacing the old “insider” committee (the SARC) with a standalone office staffed by external experts—including people who actually have bank experience, not just exam experience. They’re moving to a “non-deference” standard. In plain English: the examiner isn’t automatically right anymore. They have to prove their case based on material financial risk, not just because “that’s how we’ve always done it.”
Focusing on the “Financial” in Financial Risk
The deregulatory wave isn’t stopping at audits. We’re seeing a total re-centering on what matters.
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Bye-bye, “Reputation Risk”: The FDIC is moving to prohibit examiners from using the vague threat of “reputation risk” to force you to drop legal customers. Whether it’s an energy company or a local gun shop, if they are a law-abiding business, it’s your call who you bank, not the regulator’s.
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CRA Reset: They are pulling back the 2023 CRA rule that was, frankly, a data-collection nightmare for community banks.
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Exam Cycles: If you’re under $3 billion and well-rated, your compliance exams are moving toward a five-year cycle. That’s more time in the community and less time in the audit room.
Making a List And Checking It Twice:
Compliance Officer’s “Appeals-Ready” Checklist
1. Immediate Threshold & Audit Strategy
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[ ] Review Audit Scope: If your bank is between $500 million and $1 billion, confirm with your Board if you will pivot away from a full external financial statement audit for 2026.
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[ ] ICFR Assessment Wind-down: If your bank is between $1 billion and $5 billion, evaluate the potential to reduce the internal control testing burden required under Part 363.
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[ ] Update Strategic Plan: Adjust your compliance budget to account for the new indexed thresholds (CPI-W adjustments), ensuring you aren’t over-budgeting for “large bank” compliance that no longer applies to you.
2. Pre-Examination Prep (The “Materiality” Filter)
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[ ] Audit the Examiners: Review your last two exam reports. Flag any previous “Matters Requiring Attention” (MRAs) that were process-driven rather than financial-risk driven. Use these as benchmarks to push back on similar findings in the next cycle.
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[ ] Document Financial Impact: For any new internal findings, require your team to document the potential material financial harm or specific statutory violation. If a finding doesn’t meet these new “Safe and Sound” criteria, prepare to challenge its classification as an MRA.
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[ ] Leverage the 5-Year Cycle: If your bank qualifies for the extended exam cycle ($350M–$3B with 1 or 2 ratings), schedule a “Mid-Cycle Health Check” to ensure your CMS (Compliance Management System) remains robust during the longer gap between exams.
3. Building the “Appeals Defense” File
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[ ] “Non-Deference” Documentation: Ensure all management responses to examiner findings are drafted with the expectation of an independent review. Don’t just argue the facts; argue the reasonableness of the supporting evidence provided by the examiner.
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[ ] Contemporaneous Evidence: Maintain a “Supervisory Dialogue Log.” Note any instances where an examiner attempts to exert “managerial judgment” (e.g., telling you how to run a business line) rather than pointing to a safety and soundness failure.
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[ ] MRA vs. Observation: If an examiner presents a deficiency, immediately ask: “Does this meet the new regulatory definition of an unsafe/unsound practice?” If not, push for it to be categorized as a “Non-Binding Supervisory Observation.”
4. Consumer & Community Safeguards
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[ ] Reputation Risk Shield: Review your Credit Policy. Explicitly state that credit decisions are based on creditworthiness and risk appetite, not “reputation risk.” This creates a paper trail to prevent “debanking” pressure from regulators.
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[ ] CRA Pause: Halt any major software implementations or data-mapping projects specifically tied to the rescinded 2023 CRA rule. Revert to the previous standards until the “workable” replacement is finalized.
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[ ] Climate Risk Purge: Remove any climate stress-testing requirements from your internal risk manuals. Refocus those resources on core credit and liquidity risk assessments.
The Appeals Timeline: Know Your Rights
If you receive a material supervisory determination you disagree with, the clock starts immediately:
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30 Days: File a request for review with the appropriate Division Director.
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30 Days (after Director’s decision): File your formal appeal to the Office of Supervisory Appeals (OSA) if the Division Director’s response is unsatisfactory.
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90 Days: The OSA must convene a hearing.
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45 Days (after hearing): A final, written decision must be issued by the independent panel.
The Barret Take
At the end of the day, community banking is about relationships and risk management—not just shuffling paper to satisfy a process-driven examiner. These shifts from Chairman Hill suggest a return to a “Safety and Soundness” focus that respects the local banker’s ability to run their own shop.
It’s a lot to digest as we head into the new year, but for the first time in a long time, the regulatory winds are at our backs. Let’s make sure we use this “regulatory breathing room” to do what we do best: serving our neighbors and growing our communities.
AI was used in the creation of this post