Key Points
- The Federal Reserve has released new, looser guidelines for bank supervision.
- The new rules direct examiners to focus on “material financial risks” rather than on processes and documentation.
- The banking industry has praised the changes, but has been sharply criticized by the former top Fed regulator, Michael Barr.
- This move is part of a broader trend of deregulation under the Trump administration. The Fed’s regulatory staff is also being cut by about 30%.
The Federal Reserve’s top banking regulator, Michelle Bowman, released new guidelines on Tuesday for how the agency will supervise the financial system. The changes earned praise from industry trade groups but drew sharp criticism from her predecessor.
The new principles call for bank examiners to focus on “material financial risks” and to avoid getting distracted by “excessive attention to processes, procedures, and documentation.” The guidelines were originally sent to Fed employees on October 29 but were made public on Tuesday.
Bowman, who President Donald Trump appointed in March as the Fed’s vice chair for supervision, said the new principles will “sharpen” the central bank’s focus and create a “more effective supervisory framework.”
Since Trump took office, federal bank regulators have been rolling back rules that govern the nation’s banking system. The Consumer Financial Protection Bureau, for example, is currently not operating and has reversed several regulations it put in place under President Joe Biden.
Also on Tuesday, Fed Governor Michael Barr, who held Bowman’s position before her, strongly criticized the new changes. “We are now, I believe, at a moment of inflection in the regulatory and supervisory approaches that help keep banks healthy,” Barr said in a speech. “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.”
Under the Fed’s new rules, banks can be tested only for major risks to their businesses, such as bad loans or unsound practices. They will also be allowed to self-certify on certain risk and supervision issues. These changes have been a top priority for the banking industry since Trump’s election.
Bowman has also moved to cut the Fed’s regulatory staff by about 30%, a step that Barr also criticized. He warned that the cuts “will impair supervisors’ ability to act with the speed, force, and agility appropriate to the risks” and “erode supervisors’ ability to be forward-looking.”
