WASHINGTON — Major Wall Street banks are quietly pressing the Federal Reserve to formalize recent changes to its bank supervision framework in an effort to make them more difficult for future administrations to reverse, according to a new report.
The effort comes as the Trump administration advances what The Wall Street Journal described as one of the most significant shifts in bank oversight since the 2008 financial crisis, including changes to how regulators identify and address risks at financial institutions.
At the center of the debate is the Federal Reserve’s move to scale back use of “matters requiring attention,” or MRAs — a long-standing supervisory tool used by examiners to require banks to correct deficiencies in risk management and internal controls.
According to The Wall Street Journal, banks are encouraging the Fed to provide clearer legal guidance around a softer supervisory approach that increasingly relies on “observations,” an informal mechanism regulator had previously abandoned more than a decade ago. Industry officials reportedly want written assurances that unresolved observations would not automatically escalate into MRAs unless underlying facts materially change.
Changes Led by Bowman
Fed Vice Chair for Supervision Michelle Bowman has led the changes. According to The Wall Street Journal, Bowman has argued supervisors have become too focused on minor compliance issues rather than material financial risks and has said her objective is not weaker oversight but more targeted supervision.
The Fed announced in October that MRAs would be reserved for more significant financial concerns and said it would revive observations as an informal means of flagging issues. A February memo also indicated some existing MRAs could be downgraded to observations, the report stated.
Banking advocates told the publication that excessive reliance on MRAs has become burdensome and can divert management attention. Supporters of reform have pointed to the collapse of Silicon Valley Bank, noting a Federal Reserve post-mortem found the bank still had 19 open MRAs when it failed, many unrelated to the core issues that caused its collapse.
‘Weakening Safeguards’
Critics, however, argue the changes risk weakening safeguards during a period of economic uncertainty.
Todd Baker, a senior fellow at Richman Center for Business, Law and Public Policy, told The Wall Street Journal the changes could alter the balance of power in supervision in favor of bank management. Jeremy Kress, a law professor at University of Michigan, told the publication the reforms could have lasting effects, particularly as experienced supervisory staff depart.
The report stated the broader regulatory effort also includes reducing the scale of examinations, proposing revisions to confidential bank rating systems and shrinking regulatory and supervisory staffing.
Industry observers told the publication that codifying supervisory changes into formal policy could make them more durable, although doing so would likely require approval from the Federal Reserve’s board and could face opposition from Democratic members.
