Maryland Legal Alert for Financial Services

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Federal Banking Regulators Issue Final Rule to Narrow Supervisory Focus to Material Financial Risk

Congress Enacts Permanent Increase to Bankruptcy Debt Thresholds for Small Businesses 

Federal Banking Regulators Issue Final Rule to Narrow Supervisory Focus to Material Financial Risk

The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) are adopting a final rule to issue new standards under section 8 of the Federal Deposit Insurance (FDI) Act. The rule introduces the agencies' first regulatory definition of “unsafe or unsound practice” and establishes stricter thresholds for issuing matters requiring attention (MRAs) and supervisory communications. The final rule, effective November 2, 2026, will fundamentally reshape how federal examiners identify and address problems at supervised institutions by requiring examiners to prioritize material financial risks over concerns related to policies, process, documentation, and other nonfinancial risks. 

Section 8 already included the term “unsafe or unsound practice” for purposes of enforcement authority but the statute failed to define the term. Defining the term will provide clear uniform regulatory standards nationwide. The OCC and the FDIC define an unsafe or unsound practice as an act, practice, or failure to act that is (1) contrary to generally accepted standards of prudent operation; and (2) likely to materially harm the institution's financial condition if continued or present a material risk of loss to the Deposit Insurance Fund. 

The MRA standard differs from the unsafe or unsound practice definition in two ways. The MRA standard requires that material harm be “reasonably expected” under current or reasonably foreseeable conditions, which provides a slightly lower standard. Additionally, agencies may issue an MRA for an actual violation of a banking law or regulation. MRAs will be issued only for substantive violations, including for patterns or systemic violations, violations with more than minimal adverse impact, requiring more than minimal restitution, or involving insider misconduct or self-dealing. 

The final rule clarifies that material harm to an institution’s financial condition refers to financial losses, bank failures, and instability in the banking system. This definition excludes risks to an institution's reputation unrelated to financial conditions. The agencies also expanded their explanations of what constitutes "financial condition" and how they will apply materiality standards differently across institution types. For example, the OCC may escalate formal enforcement against large or complex institutions based on practices that would not trigger similar action against community banks.

Agencies expect fewer MRAs overall as a result of the final rule. The FDIC reviewed existing supervisory criticisms and determined that a "large majority" of outstanding MRAs do not meet the new materiality standards. Those matters are being closed, while certain unresolved findings that satisfy the threshold are being elevated to MRA status. The final rule also removed institution-affiliated parties from its scope. 
This rule will bring certainty to bank examination and supervision while ensuring that attention is focused on material financial risks. Banks should also expect fewer MRAs overall, with those issued focusing on practices that pose material financial risk.

The Federal Reserve has thus far chosen not to adopt the uniform standards established by the FDIC and OCC. 

Practice Pointer: Institutions should audit their risk management protocols against the updated enforcement and supervisory manuals to ensure internal thresholds align with the regulators' new, objective criteria. 

For more information about this topic, please contact Christopher R. Rahl, and Peri L. Schuster.

Contact Christopher R. Rahl | 410-576-4222

Contact Peri L. Schuster | 410-576-4005

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Congress Enacts Permanent Increase to Bankruptcy Debt Thresholds for Small Businesses 

Federal lawmakers have passed legislation that substantially raises the debt ceilings governing expedited bankruptcy procedures for small businesses. This change officially marks the end of a two-year period of uncertainty following the expiration of temporary pandemic-era relief measures.

The Bankruptcy Threshold Adjustment Act of 2026 received final approval from the House of Representatives in mid-September, following Senate passage by unanimous consent the previous month. The coordinated legislative effort was introduced earlier in the year with companion bills: S.3977 in the Senate and H.R. 7730 in the House.

The new law restores the Subchapter V debt limit to $7.5 million, reversing a reduction from $2.7 million that took effect in 2024. Subchapter V, a specialized component of Chapter 11 of the Bankruptcy Code, was designed to provide small commercial businesses with a streamlined reorganization path that costs less and moves faster than conventional Chapter 11 proceedings.

When Congress temporarily increased the Subchapter V threshold during the COVID-19 crisis, filings under the subchapter surged as more businesses qualified for the accelerated process. The return to a lower ceiling two years ago created immediate challenges for bankruptcy practitioners, who found themselves developing strategies to help clients satisfy the reduced limit, including negotiating debt reductions and restructuring claims.

The legislation also clarifies that at least half of a qualifying debtor's obligations must arise from commercial or business operations. It further excludes certain categories of entities, including single-asset real estate companies, publicly reporting corporations and their affiliates, and affiliated business groups whose combined debts exceed the new ceiling.

For small business owners, the return to the $7.5 million ceiling means that mid-sized commercial operations facing temporary cash-flow disruptions or market downturns can reorganize without the expense and complexity of full Chapter 11 administration. The streamlined procedures under Subchapter V include reduced reporting requirements, expedited plan confirmation timelines, and the absence of creditor committees in most cases.

The 2026 legislation establishes a higher, permanent eligibility threshold intended to reflect current small-business debt levels. The new legislation is now awaiting presidential signature to become enacted into law.

For more information about this topic, please contact Christopher R. Rahl, Peri L. Schuster and James J. McKittrick.

Contact Christopher R. Rahl | 410-576-4222

Contact Peri L. Schuster | 410-576-4005

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