Federal Reserve to Review and Potentially Eliminate Confidential Bank Warnings in Supervision Overhaul
The Federal Reserve has signaled to lenders across the United States that it plans to abandon some of the confidential warnings it previously issued to improve their operations. This move comes as Vice Chair Michelle Bowman continues to relax the central bank's oversight of American financial firms, marking a significant shift in regulatory approach.
Examiners Begin Review of Outstanding Warnings
Earlier this month, the Fed's supervision staff informed banks nationwide that examiners would initiate reviews of outstanding warnings, which are private orders to address deficiencies. According to individuals familiar with the matter who requested anonymity because the change has not been publicly announced, these warnings will be eliminated if they do not align with the Fed's recent directive.
That directive instructs examiners to concentrate more on immediate risks to a bank's financial health and less on processes and procedures. Executives at each financial institution will have the opportunity to engage with regulators on a plan to resolve any remaining warnings that survive the review process.
Targeting "Matters Requiring Attention" and "Matters Requiring Immediate Attention"
The Fed is specifically targeting what are known as "matters requiring attention" and "matters requiring immediate attention." The latter represents an urgent demand for swift corrective action. Either type of warning could be triggered by concerns about various aspects of a bank's operations, ranging from its financial condition to cybersecurity preparedness or succession planning.
While the Fed will continue to issue these directives during regular examinations if examiners identify problems, the threshold for issuing them will be higher under the new approach. This represents a fundamental change in how regulators interact with financial institutions.
Easier Regulatory Regimen Under Trump Administration
President Donald Trump's financial regulators have consistently promised to relax Washington's complex matrix of rules. Bankers have long contended that regulations have become overly complex as they accumulated in the years following the Great Financial Crisis. Industry representatives argue that this regulatory burden has increased costs, discouraged lending, and not necessarily made the financial system safer.
Vice Chair Bowman has committed to a comprehensive overhaul of how the agency oversees risk, with an emphasis on greater transparency. A representative for the Federal Reserve declined to comment on the specific changes.
Focus on Material Financial Risks
According to a Fed memo to staff reviewed by Bloomberg, the new review aims to help examiners "enhance the effectiveness of supervision by focusing on material financial risks to a bank's safety and soundness." The review will ensure that examiners' supervisory findings are "based on deficiencies which, if not remediated in a timely manner, would create a significant probability of higher-than-normal harm to the financial condition of the supervised firm."
This represents a shift away from concerns about policies, procedures, or controls that don't directly threaten financial stability. The memo also emphasizes that warnings must be issued in "plain language and sufficient specificity" to be effective.
Phased Implementation and Current Reviews
The effort to scale back unresolved warnings will occur in stages through examiner reviews. Notably, consumer deficiencies or material risks are not included in this particular review process. The reviews have already begun and will continue through the end of March, with a final determination expected by the end of July.
At that time, banks will be asked to cooperate with their examiners to clarify what steps have or haven't been taken to improve lapses in critical areas such as:
- Risk management
- Compliance
- Financial condition
In some cases, the Fed may downgrade a compliance warning to become a supervisory observation that doesn't require a firm to resolve it. The review of a warning to a bank's holding company may involve consultation with a bank subsidiary's federal or state regulator.
Concerns About Relaxed Supervision
Some Federal Reserve governors, including Michael Barr, have warned that relaxing supervision could undermine oversight of Wall Street lending giants. These concerns highlight the tension between reducing regulatory burden and maintaining adequate safeguards for the financial system.
Coordinated Moves by Bank Regulators
The Fed's review follows other coordinated moves by major bank watchdogs to refocus supervision on core financial risks. In December, the Office of the Comptroller of the Currency removed part of a penalty it imposed on Citigroup Inc. a year prior, a significant sign that the bank had come closer to completing its longstanding effort to improve risk management and compliance.
Additionally, the Federal Deposit Insurance Corporation established a new unit of supervisory appeals in January to serve as the "final level of review of material supervisory determinations." These parallel developments suggest a broader trend toward regulatory recalibration across multiple agencies.
