OCC Moves to Scale Back Supervisory Burden on Community Banks

Key Takeaways

• Examination Scope Narrowed: The OCC is reducing policy-driven examination requirements for community banks and shifting toward more tailored, risk-based supervision.
• CRA Exam Scheduling Changed: Community Reinvestment Act examinations will now be scheduled with greater discretion based on a bank’s size, complexity, and risk profile.
• Capital Rules Simplified: Changes to the Community Bank Leverage Ratio framework are intended to simplify capital calculations and reduce reporting burdens for qualifying banks under $10 billion in assets.
• Model Risk Expectations Clarified: Updated OCC guidance emphasizes that model risk management practices should remain proportional to an institution’s size and complexity, with community bank models generally excluded.
• Cybersecurity Exams Streamlined: The OCC said it has updated examiner resources to narrow the scope of bank information technology and cybersecurity examinations for community banks.

Deep Dive

The OCC has outlined a series of supervisory and regulatory changes aimed at reducing burden on community banks while preserving what the agency described as a risk-based approach to oversight. The reforms touch everything from Community Reinvestment Act examinations to capital calculations, model risk management, and cybersecurity reviews.

“Community banks are anchors of local economies, providing essential banking services and small business lending that helps power job creation,” said Comptroller of the Currency Jonathan V. Gould. “The OCC has taken a range of actions to better tailor its supervision and provide meaningful reforms to community banks so they can continue to drive economic development in their local communities and the broader national economy.”

Some of the most consequential changes actually sound fairly mundane on paper. Last October, the OCC issued guidance removing examination activities that had previously been required through agency policy in areas including Community Reinvestment Act performance, fair lending, end-user derivatives, and trading. Instead of automatically applying those examination activities across community banks, the agency said examiners should tailor reviews based on a bank’s size, complexity, activities, and risk profile. The guidance became effective January 1.

That distinction matters because regulatory burden rarely arrives all at once. It accumulates quietly through examination expectations, documentation requests, governance reviews, reporting requirements, and policies that remain in place long after they stop making practical sense for smaller institutions.

The OCC also said it updated its CRA examination scheduling policies to give examiners more discretion over how frequently community banks are reviewed. Going forward, scheduling decisions will consider factors such as complexity, size, and risk profile rather than relying solely on standardized examination cycles established through internal policy.

For smaller banks, even relatively modest supervisory changes can have an outsized operational impact. Community institutions typically operate with leaner compliance and risk management functions than larger national banks, which means examination preparation often pulls employees away from day-to-day lending and operational responsibilities.

The agency also finalized changes to the Community Bank Leverage Ratio framework, which allows qualifying institutions to use a simplified measure of capital adequacy. According to the OCC, the revised framework simplifies capital calculations, shortens reporting schedules, and provides regulatory relief while maintaining safety and soundness standards. Most OCC-supervised institutions with less than $10 billion in assets qualify to elect the framework.

Another notable shift involved model risk management guidance. The OCC updated guidance for supervised institutions to clarify that model risk management practices should be proportional to a bank’s size, complexity, and use of models. The agency emphasized that the guidance does not establish enforceable standards or prescriptive requirements.

Community bank models are generally excluded from the guidance altogether. The OCC said smaller institutions typically rely on internal governance and risk management practices appropriate to their scale and risk profile, making broader model governance expectations unnecessary in many cases.

Cybersecurity and bank information technology examinations are also being narrowed for community banks. The OCC said examiners are now required to use an updated resource intended to simplify and focus those reviews while still assessing cybersecurity preparedness through a risk-based approach.

These changes have been building across parts of the banking industry since the regional banking turmoil of 2023 reignited debate over whether regulators had become too focused on process-heavy supervision that treated vastly different institutions too similarly. Community banks have argued for years that regulatory frameworks designed around larger and more complex firms increasingly imposed disproportionate compliance costs on smaller lenders with comparatively straightforward business models.

The OCC is not dismantling those frameworks. But it is signaling that scale and complexity are supposed to matter again.

Whether that translates into meaningful change inside actual examinations will likely determine how community banks ultimately view the effort. Supervisory reform tends to sound cleaner in Washington press releases than it does across a table during an exam review.

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