U.S. bank regulators pare back supervision in broad post-crisis overhaul

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U.S. bank supervision overhaul

Highlights

U.S. bank regulators narrowed supervisory focus to material financial risks, raising thresholds for findings and limiting reputational risk oversight, as of June 2024.
Matters requiring attention (MRAs) will now address only material financial risks, with lesser issues handled through nonbinding observations instead of corrective directives.
The Fed, FDIC, and OCC are revising the CAMELS ratings to emphasize financial risk, streamlining appeals with new independent bodies, and curtailing horizontal reviews of large banks.

Supervisory standards shift toward core financial risks

As reported by Reuters, the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation are raising the threshold for supervisory findings by directing examiners to focus on material financial risks rather than paperwork or process issues that do not pose immediate threats to a bank's safety and soundness.

As part of that shift, regulators are no longer policing reputational risk, a measure banks have long argued gives examiners too much room for subjective judgments. Critics say that reduces supervisors' ability to address control failures, governance weaknesses and other process issues that may not initially qualify as material financial risks but can later develop into larger problems.

The agencies are also restricting the use of matters requiring attention, or MRAs, which are confidential directives ordering banks to fix issues or risk possible enforcement action. Examiners may now use MRAs only for material financial risks, while lesser concerns are being handled through nonbinding observations.

Appeals, ratings and review practices are being recast

Regulators are also trying to reduce overlap in examinations by pushing agencies to coordinate more closely and rely more heavily on each other's work. The Fed has told staff to depend as fully as possible on reviews conducted by another agency when that agency is the lender's primary supervisor, and to conduct its own exam work only when that is not reasonably possible.

The Fed is also instructing examiners to lean more on a bank's internal audit function when it is deemed sufficient, using those audit findings to assess whether problems have been fixed instead of repeating the analysis independently. At the same time, all three agencies are revising the confidential CAMELS ratings framework to place more weight on financial risk and less on factors the industry considers more subjective, including assessments of management quality.

The FDIC and OCC are separately restructuring how banks appeal MRAs, ratings and related decisions, creating new independent bodies that banks say should make the process more transparent and less influenced by the examiners behind the original findings. Another tool is also being curtailed, with new Fed principles directing staff to stop horizontal reviews of large banks unless senior leadership decides they are critically necessary.

In our earlier coverage of diverging post-crisis capital rules, we explained how deregulation in the U.S. and UK is increasing major banks’ balance-sheet capacity, while EU and Swiss lenders face tighter capital constraints. The piece noted that looser requirements have supported U.S. banks’ market share and boosted their ability to hold and trade government debt, widening the competitive gap across regions.

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