WASHINGTON, May 26 – Federal banking regulators under Republican President Trump are implementing the most extensive changes to financial institution oversight since the 2008 financial crisis. The agencies argue that bank examiners have become overly focused on procedural matters and minor violations, and should instead concentrate on significant financial threats. However, critics contend these modifications will collectively undermine the financial system’s stability.
SHIFTING FOCUS TO ‘MATERIAL’ THREATS
The Federal Reserve, Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) have collectively elevated the bar for supervisory findings by directing examiners toward “material financial risks” rather than documentation and procedural matters that don’t present immediate dangers to a bank’s safety and stability.
Within this transformation, the agencies have ceased monitoring reputational risk, a measure that financial institutions had long criticized for providing examiners excessive discretion to penalize them based on subjective criteria. Trump has also personally criticized banks for using reputational risk management as justification to refuse services to conservatives, allegations the banks reject.
Critics argue the modifications have diminished examiners’ authority to address issues that may not constitute material financial risks initially, but could eventually create problems – including control failures, governance concerns, or other procedural matters.
LIMITING ‘MRA’ DIRECTIVE USAGE
To guarantee examiners concentrate on material threats, the agencies have limited the application of “matters requiring attention (MRAs),” confidential orders requiring banks to address issues or potentially face enforcement action.
For more than ten years, MRAs have served as examiners’ main instrument for overseeing banks, but financial institutions claim they are often applied to trivial matters. Examiners may now only issue MRAs for material financial risks. For other concerns, they can provide non-binding “observations,” according to the agencies.
When a bank voluntarily identifies an issue that would typically have resulted in an MRA and starts addressing it, bank examiners have been instructed to provide an observation instead.
The OCC and FDIC have also suggested regulations that would limit the definition of “unsafe and unsound” practices that examiners should monitor.
ELIMINATING REDUNDANCY, DEPENDING ON BANKS’ INTERNAL AUDITING
Banking regulators have instructed examiners to coordinate more effectively with one another to reduce redundant efforts. The Fed has instructed staff to depend to the “fullest extent possible” on examination work conducted by other agencies when they serve as the bank’s primary supervisor, and to perform their own examinations only when it isn’t “reasonably possible” to rely on another agency’s work.
Likewise, the Fed has informed examiners that as long as a bank’s internal audit function is adequate, they should depend on those auditors’ conclusions to determine whether an issue has been resolved, rather than performing their own evaluation.
PRIVATE RATING SYSTEMS
All three agencies are also restructuring the private rating system examiners use to evaluate banks, where institutions with poor scores may face penalties or operational restrictions. The “CAMELS” rating assesses banks across multiple factors, but the industry has criticized the framework as overly subjective. Regulators have suggested updating these measures to re-emphasize financial risk factors while de-emphasizing what banks describe as more vague elements such as management quality.
MODIFYING THE APPEALS SYSTEM
The FDIC and OCC are restructuring their process for reviewing bank appeals regarding issues like MRAs, regulatory ratings, and other matters to make them more organized, independent, and transparent, the agencies state. Banks claim the current appeals process lacks transparency, with excessive involvement from examiners who made the initial decision. Both agencies have established new, independent bodies to resolve disputes.
At the Fed, banks have been informed that if they believe their examiners aren’t following the new standards, they should report this to senior Fed personnel.
RESTRICTING HORIZONTAL EXAMINATIONS, INSPECTION INTENSITY
Another supervisory method being phased out is the “horizontal review,” where bank examiners investigate a group of similar banks regarding the same issue. Banks had long criticized such reviews as potentially becoming fishing expeditions, with examiners searching for problems without specific cause. The new Fed guidelines direct staff to stop horizontal reviews of large banks unless Fed leadership deems them critically necessary.
