Beyond ‘Material’: Clarifying Risk Magnitude in Unsafe or Unsound Practices

This article was developed using publicly available responses submitted to Requests for Information issued by banking regulators. It summarizes and synthesizes themes, perspectives, and information reflected in those public submissions for informational purposes only. The article does not represent the views of any regulator, respondent, institution, or the Firm, and should not be interpreted as legal, regulatory, or compliance advice.

Executive Summary

Respondents broadly support supplementing or replacing “material” with clearer descriptors of risk magnitude in defining unsafe or unsound practices. Commenters repeatedly invoke formulations like “abnormal risk of loss or damage” and “undue risk,” with some proposing phrases such as “reasonably foreseeable undue risk” or “unacceptable levels of risk.” The key challenge is choosing terms that capture forward-looking prudential concerns without ambiguity. With 86.67% responses on this question, the record favors adopting additional terminology that better signals supervisory thresholds.

Key takeaways:

• Multiple submissions endorse “abnormal risk of loss or damage” as a defining threshold for unsafe or unsound practices.
• At least one commenter explicitly prefers “undue” as a more appropriate term than “material.”
• Proposed phrasings include “reasonably foreseeable undue risk” and “unacceptable levels of risk.”
• Several filings caution that “abnormal” is a relative concept that requires definition to avoid ambiguity.
• Some respondents warn that relying solely on “material” could under-scope risks that are prudentially unsafe.
• A subset of commenters did not provide alternative terms and focused on other aspects of supervisory standards.

Bottom line:

Agencies should consider terms beyond “material,” especially “abnormal” and “undue,” and may also use phrases like “reasonably foreseeable undue risk” or “unacceptable levels of risk” to better reflect supervisory thresholds for unsafe or unsound practices.

The Question (Ref #4)

Other than ‘‘material,’’ are there terms that the agencies should consider to specify the magnitude of the risk required for a practice, act, or failure to act, to be considered an unsafe or unsound practice, e.g., ‘‘abnormal,’’ ‘‘significant,’’ or ‘‘undue’’?

Direct Response to the Catalog Question

Introduction

Question 4 asks whether agencies should consider terms other than “material”, for example, “abnormal,” “significant,” or “undue”, to specify the magnitude of risk required for a practice, act, or failure to act to be deemed unsafe or unsound. The record shows strong interest in clarifying this threshold with established prudential phrasing and forward-looking qualifiers.

Historic Lessons in the Evidence

Commenters consistently point back to formulations like “abnormal risk or loss or damage” and definitions tied to standards of prudent operation, arguing these reflect how prudential supervision has long framed unsafe or unsound practices. Their reasoning emphasizes that relative terms can appropriately capture deviations from prudent norms, while warning that ambiguity in words like “abnormal” requires careful articulation to ensure consistent application.

The Challenge

The primary practical challenge is balancing clarity with flexibility: terms like “abnormal” and “undue” resonate with prudential aims yet can be interpreted variably without explicit context. Several respondents call for clearer definitions and guardrails so that thresholds neither overreach nor become so narrow, via “material” alone, that foreseeable, imprudent risks evade scrutiny.

Evolving Metrics

Respondents justify thresholds using prudential anchors (“contrary to generally accepted standards of prudent operation”), temporal qualifiers (“if continued”), and foreseeability (“reasonably foreseeable”). Some highlight holistic assessment of significant elements and potential consequences that “could potentially result in” loss or deterioration, signaling that magnitude should be evaluated prospectively and contextually rather than solely by realized, material harm.

A Framework Inspired by the Inputs

An implicit pattern emerges: define unsafe or unsound practices by linking a prudential baseline (accepted standards) to a magnitude qualifier (abnormal/undue/unacceptable) plus forward-looking conditions (reasonably foreseeable; if continued) and institutional impact (risk of loss, damage, or financial stability). This structure preserves supervisory discretion while offering clearer cues for when risk crosses the unsafe threshold.

Case Study

Across the record, legal analyses, industry groups, and individual commenters converge on replacing or supplementing “material” with terms such as “abnormal” and “undue.” One proposes “reasonably foreseeable undue risk” to capture forward-looking harms; another references “unacceptable levels of risk.” Collectively, these filings illustrate a pattern of grounding magnitude in prudential standards and foreseeability rather than limiting action to realized, material harm.

Recommendations

1. Incorporate “abnormal risk of loss or damage” as an explicit magnitude threshold tied to unsafe or unsound practices.
2. Add “undue risk” and the phrase “reasonably foreseeable undue risk” to capture forward-looking prudential concerns.
3. Recognize “unacceptable levels of risk” as a complementary signal warranting supervisory action.
4. Clarify that “material” should not be the sole gating threshold to avoid under-capturing imprudent, foreseeable risks.
5. Define how these terms relate to “generally accepted standards of prudent operation” to ensure consistency in exams.
6. Use temporal qualifiers such as “if continued” and foreseeability to operationalize thresholds in guidance and findings.
7. Provide examiner factors and examples illustrating abnormal/undue/unacceptable risk determinations without relying on realized loss.

Conclusion

The record supports expanding beyond “material” to terms that better capture prudential risk magnitude. Agencies should adopt formulations like “abnormal risk of loss or damage” and “undue risk,” potentially with phrases such as “reasonably foreseeable undue risk” and “unacceptable levels of risk.” Doing so aligns with longstanding prudential concepts and addresses commenters’ concerns that materiality alone is too narrow for identifying unsafe or unsound practices.

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