Federal Reserve Outlines Next Steps in Banking Supervision Modernization

Amid a rapidly evolving financial landscape, the Federal Reserve is pressing ahead with significant updates to its regulatory and supervisory framework, aiming to better align oversight with the needs of banks of all sizes—especially community institutions.

Michelle W. Bowman, Vice Chair for Supervision at the Federal Reserve, highlighted these reforms in a recent speech, addressing the importance of pragmatic and tailored regulatory approaches. Citing lessons learned from recent banking crises such as the Silicon Valley Bank collapse, Bowman explained that the Fed has focused on early risk detection, transparency, and removing distractions from non-core risks. Notably, recent months have seen the Fed publish new supervisory operating principles to clarify examiner priorities, eliminate the use of vague tools like "reputational risk," and shift focus purely to material financial risks that could impact the safety and stability of banks and the broader system.

A major part of the modernization campaign includes recalibrating capital requirements for community banks, such as proposing to lower the community bank leverage ratio, and reforms to the supervisory ratings framework to ensure a more accurate reflection of banks' actual risk profiles. The Federal Reserve is also proposing regulatory changes to better define "unsafe and unsound" banking practices and to adjust outdated asset thresholds that determine regulatory burden—a move intended to ensure banks are not subject to increasing oversight purely due to inflation or normal growth. These initiatives seek to make regulation more nuanced, incorporating business models and risk rather than relying solely on raw asset size.

Bowman emphasized several practical concerns, such as the reporting burden on smaller institutions, the inefficiencies in the application process for bank mergers or new activities, and the need for better coordination and less duplication among different regulatory bodies. Transparency remains a core goal, with recent and planned releases of supervisory manuals to give banks better insight into expectations and help foster accountability. Bowman acknowledged ongoing constraints around the sharing of supervisory information but called for reform to promote beneficial information sharing without jeopardizing security or privacy.

These efforts collectively signal the Federal Reserve’s commitment to strengthening U.S. economic resilience by sharpening the focus of bank supervision, removing outdated or unduly burdensome regulations, and bolstering transparency and efficiency within the regulatory process. The reforms underscore that a modern, risk-based approach is not just desirable but crucial for the stability of the financial system in the years ahead.