Federal Reserve Unveils New Guidelines for Banking Oversight

The Federal Reserve has announced new guidelines for supervising the financial system, a move that has garnered support from industry groups while facing criticism from former regulators. Released on October 29, 2023, the guidelines emphasize a shift in focus towards material financial risks, aiming to streamline the examination process for banks.

In a memo to Fed employees, Michelle Bowman, the Federal Reserve’s vice chair for supervision, stated that the principles would enhance the effectiveness of the supervisory framework. “By anchoring our work in material financial risks, we strengthen the banking system’s foundation while upholding transparency, accountability, and fairness,” she explained.

These changes reflect a broader trend initiated during the Trump administration, which has seen federal regulators roll back certain financial regulations. During this period, the Consumer Financial Protection Bureau, established in response to the 2008 financial crisis, has effectively ceased operations and rescinded several regulations implemented under President Biden.

Michael Barr, who previously held Bowman’s position, criticized the recent changes in banking oversight during a public speech. He expressed concern that the current regulatory environment is shifting towards a more lenient approach, which could jeopardize the stability of banks. “There are growing pressures to weaken supervision in ways that will make it harder for examiners to act before it is too late to prevent a build-up of excessive risk,” Barr remarked.

Under the new guidelines, bank examiners will concentrate on tangible risks that threaten a bank’s financial stability, such as bad loans or unsound business practices. This marks a departure from previous practices that required extensive documentation and procedural adherence, which critics argue detracted from essential risk assessment.

Bowman’s memo stipulates that banks may now self-certify on certain risk and supervision matters, a measure that aligns with the priorities of the banking industry since the election of President Trump. Greg Baer, president and CEO of the Bank Policy Institute, supported the new framework, asserting that banks perform best when examiners prioritize material financial risks rather than compliance exercises.

Additionally, the Federal Reserve will coordinate with other regulatory bodies, including the Office of the Comptroller of the Currency (OCC) and state regulators, to determine supervisory responsibilities. This collaborative approach aims to create a more cohesive oversight strategy across various institutions.

Concerns have also been raised regarding staffing reductions at the Federal Reserve, which Bowman has proposed to decrease by approximately 30% through attrition. Barr highlighted that such cuts could impair the ability of supervisors to respond effectively to risks, potentially delaying necessary actions to protect both the public and the banking sector. “Such a drastically reduced staff will slow response time for the public and the banks themselves,” he warned.

As the financial landscape continues to evolve, the implications of these new guidelines will be closely monitored by both industry stakeholders and regulatory advocates. The Federal Reserve’s approach to banking oversight will play a crucial role in shaping the future stability of the financial system.