How Federal Reserve Bank Supervisors Protect the U.S. Financial System

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While the bank supervision staff of the Federal Reserve rarely makes headlines, their daily efforts are a cornerstone of economic stability.

This role is far from a static, box-checking exercise; it is a dynamic function that constantly adapts to financial innovation, responds to economic crises, and reflects the shifting philosophies of government oversight.

In This Article

• The Federal Reserve supervises banks and holding companies to promote stability in the U.S. financial system and ensure safe, sound, and compliant operations.
• Supervision occurs at both the Board of Governors level and through the 12 regional Federal Reserve Banks, which conduct examinations and risk assessments of institutions in their districts.
• The Fed’s oversight focuses on two broad areas: micro-prudential supervision (ensuring individual banks remain safe and sound) and macro-prudential supervision (monitoring systemic risks across the banking system).
• Supervisors use the CAMELS rating system—Capital, Asset quality, Management, Earnings, Liquidity, and Sensitivity to risk—to evaluate bank health.
• Oversight intensity scales with bank size and complexity, with community banks receiving less intrusive reviews and large institutions facing continuous monitoring.
• The Fed coordinates its supervisory responsibilities with the FDIC, OCC, and state banking regulators, who oversee different categories of banks.
• Consumer protection and community reinvestment compliance are also part of the supervisory framework, ensuring fair lending and equitable access to credit.
• After the 2023 bank failures, the Fed acknowledged weaknesses in its supervisory response and began reviewing its approach to escalating supervisory concerns.
• Current reforms (2024–2025) aim to refocus examinations on “core and material” financial risks, while critics warn that loosening standards could increase the chance of future crises.
• The Fed continues to refine its balance between maintaining rigorous oversight and allowing institutions flexibility to innovate and compete.

So What

• Public confidence in the banking system depends heavily on effective supervision; even small lapses can trigger systemic consequences.
• Overlap among regulators—the Fed, FDIC, OCC, and state agencies—creates a complex but necessary safety net, though it also risks gaps or delays in oversight.
• Policy reforms now underway will shape how aggressively the Fed monitors risk, influencing not only bank behavior but also credit availability, innovation, and financial stability.
• For businesses and consumers, understanding the Fed’s supervisory role clarifies how banking safety, deposit protection, and lending standards are maintained.
• In short, how the Fed supervises banks today determines how resilient the U.S. financial system will be in the next downturn.

The Fed’s Supervisory Mandate and Structure

The Federal Reserve’s authority to supervise banks is rooted in a mandate to protect the financial system at both the individual institution and systemic level. This mission is carried out through a unique organizational structure, a hybrid system designed nearly a century ago to balance national authority with regional economic realities.

Three Core Objectives

The core objectives of Federal Reserve supervision can be understood as three distinct but interconnected pillars: ensuring the safety of individual banks, maintaining the stability of the entire financial system, and enforcing compliance with the law.

First, at the most granular level, is micro-prudential supervision. This is the classic role of the bank examiner: to ensure that individual financial institutions operate in a “safe and sound manner.”

Supervisors assess whether banks have sufficient financial resources—particularly capital to absorb unexpected losses—and whether their management teams are capable of identifying and controlling the risks they take.

Second is macro-prudential supervision, a broader and more modern focus that gained prominence after the 2008 global financial crisis. This pillar involves monitoring the stability of the U.S. financial system as a whole.

The goal is to prevent the failure of one large or interconnected institution from triggering a domino effect—a systemic crisis—that could cripple the wider economy. This requires supervisors to look beyond a single bank’s balance sheet and consider how risks are building up across the entire financial landscape.

These two goals, while complementary, can create inherent tension. An action that makes a single bank safer in isolation, such as forcing it to rapidly sell assets to raise capital during a downturn, could be disastrous if applied to many banks simultaneously.

Such a “fire sale” could depress asset prices across the market, weakening other institutions and creating the very systemic instability that macro-prudential supervision is meant to prevent.

The 2023 failure of Silicon Valley Bank (SVB) further illustrated this dynamic; the run on the bank was driven by thousands of depositors acting rationally in their own self-interest, but their collective actions created a systemic threat that required extraordinary government intervention.

Fed supervisors must constantly navigate the delicate balance between enforcing rules at one firm and considering the second- and third-order effects of their actions on the entire system.

The third pillar is compliance. Fed examiners are responsible for ensuring that the institutions they oversee adhere to a vast array of federal laws and regulations.

This includes everything from consumer protection laws that ensure fair lending practices to complex anti-money laundering (AML) rules designed to combat financial crime.

How the Board of Governors Sets Policy

The Federal Reserve System’s structure is a deliberate blend of centralized authority and decentralized operations.

At the center is the Board of Governors, an independent federal government agency based in Washington, D.C. The Board is responsible for setting the overarching policies, rules, and guidance that govern bank supervision across the country.

The Board is led by seven governors who are nominated by the President of the United States and confirmed by the Senate. To insulate them from short-term political pressures, governors are appointed to long, staggered 14-year terms.

This independence is considered crucial for making supervisory decisions based on economic and financial merits rather than political expediency.

The Board oversees the 12 regional Reserve Banks, approves their budgets, and has the final say on all significant supervisory and regulatory matters.

The detailed structure of the Board’s powerful Division of Supervision and Regulation is publicly available through organizational charts, showing a complex hierarchy responsible for everything from policy analytics to community bank supervision.

The 12 Regional Reserve Banks

While the Board in Washington sets the strategy, the day-to-day tactical work of bank supervision is delegated to the staff at the 12 regional Federal Reserve Banks located in major cities across the country, from Boston to San Francisco.

These Reserve Banks are the “operating arms” of the system, each responsible for supervising the financial institutions located within its designated geographic district.

This decentralized structure was a deliberate choice by Congress in 1913, born from a desire to avoid concentrating all financial power in Washington or on Wall Street.

The regional structure ensures that local economic conditions and the unique challenges facing communities across the country are understood and factored into national policy.

This structure makes supervision a critical intelligence-gathering function that directly informs the Fed’s other primary mission: conducting monetary policy.

The bank examiners at the regional Reserve Banks, through their constant interactions with banks of all sizes, develop a unique, granular view of the economy from the ground up. They see firsthand whether businesses are getting loans, how credit quality is trending, and what the sentiment is on “Main Street.”

This qualitative information is a vital input for the Reserve Bank presidents when they attend meetings of the Federal Open Market Committee (FOMC), the body that sets the nation’s interest rates.

This on-the-ground intelligence, which also informs the Fed’s “Beige Book” report on regional economic conditions, provides a crucial reality check against the high-level macroeconomic data analyzed in Washington.

Who the Fed Supervises

The U.S. financial regulatory system is a complex web of overlapping jurisdictions. The Federal Reserve is a key player, but its supervisory authority is limited to specific types of institutions.

Within its purview, the Fed applies a tailored approach, recognizing that a small community bank in a rural town poses a very different set of risks than a global financial conglomerate headquartered in New York City.

The Fed, OCC, and FDIC

Bank supervision at the federal level is not the sole responsibility of the Fed. It is a shared duty among three primary agencies: the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC).

State banking agencies also play a crucial role in supervising state-chartered institutions.

An institution’s primary federal regulator is determined by its legal charter. The OCC, a bureau within the U.S. Treasury Department, supervises all nationally chartered banks.

The Fed and the FDIC, in coordination with state regulators, share responsibility for the thousands of banks that are chartered by individual states.

Here’s how the Fed coordinates with other banking regulatory bodies: the Federal Deposit Insurance Corporation (FDIC) insures deposits and examines state-chartered banks that are not members of the Federal Reserve System, while the Office of the Comptroller of the Currency (OCC) oversees nationally chartered banks and federal savings associations. The Fed supervises bank holding companies, financial holding companies, and state-chartered banks that choose to become Federal Reserve members. State banking regulators conduct their own examinations of state-chartered institutions, often in coordination with federal counterparts. To avoid duplication, these agencies participate in joint examinations and share information through formal agreements and the Federal Financial Institutions Examination Council (FFIEC), which promotes consistent standards and reporting. Despite this cooperation, differences in agency mandates and supervisory approaches sometimes lead to gaps or inconsistencies in oversight, especially when financial institutions operate across multiple jurisdictions.

The Fed’s Jurisdiction

The Federal Reserve’s specific supervisory jurisdiction extends to several key categories of financial institutions:

• State Member Banks: These are banks that are chartered by a state but have voluntarily chosen to become members of the Federal Reserve System. While all nationally chartered banks are required to be members, state banks have the option. At the end of 2023, there were 706 state-chartered commercial banks that were members of the Federal Reserve System.

• Bank Holding Companies (BHCs) and Savings and Loan Holding Companies (SLHCs): This is the largest and most significant segment of institutions supervised by the Fed. A holding company is a corporation that owns a controlling interest in one or more banks. By supervising the parent holding company, the Fed gains a consolidated view of the entire banking organization, including its non-bank subsidiaries. This “umbrella supervision” is crucial for understanding the full range of risks across a complex financial group.

• Foreign Banking Organizations (FBOs): The Fed is responsible for supervising the U.S. operations of foreign banks, including their branches, agencies, and U.S.-based subsidiaries.

A Tailored Approach

The Federal Reserve explicitly rejects a “one-size-fits-all” approach to supervision. The level of scrutiny and the resources dedicated to supervising an institution are tailored to its size, complexity, and risk profile.

Supervisory rigor increases substantially as a firm grows larger and more complex.

Community and Regional Banks: Institutions with total assets below $100 billion are generally overseen by Community and Regional Banking Supervision teams within the regional Reserve Banks. For these firms, supervision typically involves a combination of periodic on-site examinations and continuous off-site monitoring of financial data.

Large Financial Institutions (LFIs): Firms with assets exceeding $100 billion face a much more intensive and continuous supervisory regime. These institutions, which include the nation’s largest banks, have dedicated supervisory teams that work year-round to assess their risk management, capital adequacy, and liquidity. A major focus for these firms is their resilience to severe economic stress, which is evaluated through annual stress tests.

This tiered system is a direct legacy of the 2008 financial crisis and the legislative response that followed, primarily the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The intense focus on the largest, most systemically important firms is designed to prevent the collapse of an institution that is deemed “too big to fail”—a concept that entered the public lexicon after the near-failure of Continental Illinois bank in the 1980s and became a central theme of the 2008 crisis.

The 2023 failure of Silicon Valley Bank—which was a large regional bank but not a global behemoth—posed a significant challenge to this framework. It sparked a fierce policy debate about whether the supervisory approach for banks in the $100 billion to $250 billion asset range was sufficiently rigorous, demonstrating that the lines drawn for tailoring supervision are not merely technical but are at the heart of ensuring financial stability.

How the Fed Examines Banks

To fulfill its mandate, the Federal Reserve’s supervision staff employs a sophisticated toolkit of methods and philosophies. At its core, the job of an examiner is not to run or manage a bank, but to act as an independent and expert auditor of its health and risk-management practices.

This involves a combination of deep-dive examinations, continuous monitoring, and a guiding philosophy that focuses resources on the most significant threats.

On-Site Examinations and Off-Site Monitoring

The primary tool in the supervisor’s toolkit is the bank examination, an in-depth review and evaluation of a bank’s activities, financial condition, and risk-management practices.

Examinations can be “full scope,” covering all aspects of the institution, or “target,” focusing on specific areas of potential concern, such as a bank’s commercial real estate loan portfolio or its cybersecurity defenses.

Historically, this work was performed almost entirely on-site, with teams of examiners descending on a bank’s headquarters for weeks at a time. However, significant technological advancements have radically transformed the process.

Today, a majority of examination work, including the painstaking process of reviewing individual loan files, can be conducted remotely.

This shift to off-site work offers numerous benefits, most notably minimizing the disruption to a bank’s daily operations. While it requires more upfront coordination to ensure secure access to data, it provides greater flexibility for both bankers and examiners.

To accommodate this new hybrid model, the Fed has established clear timelines, generally requiring that examination reports be completed and delivered to the institution within 60 days of the “close date.”

A Risk-Focused Philosophy

Modern Federal Reserve supervision is guided by a “risk-focused” philosophy. Rather than examining every aspect of a bank with equal intensity, supervisors customize their plan to each firm’s unique risk profile and organizational structure.

The goal is to identify the areas of greatest potential risk to the institution and to the financial system, and then to assess management’s ability to identify, measure, monitor, and control those risks.

Under this approach, activities likely to pose the highest risk receive the most scrutiny. For a large, complex bank, this might mean bringing in specialists with deep expertise in derivatives trading or international finance to assist the core examination team.

This philosophy is designed to allocate limited supervisory resources efficiently, focusing attention where it is most needed and reducing the regulatory burden on well-managed, lower-risk institutions.

The BETR Model

For community banks (those with assets under $10 billion), the risk-focused approach is enhanced by an automated surveillance tool known as the Bank Exams Tailored to Risk (BETR) model.

The BETR model leverages aggregated data metrics to help examiners objectively identify and quantify risks at a bank across various dimensions, such as credit risk, liquidity risk, and operational risk.

The output from the BETR model does not replace examiner judgment but rather informs it. The model’s results are combined with the examination team’s knowledge of the institution to develop a tailored examination scope.

For example, if the BETR model designates a bank’s credit risk as low or moderate, examiners may be able to streamline their review by analyzing a smaller sample of loans than they would for a bank with high credit risk.

The increasing reliance on such automated tools, however, represents a double-edged sword. On one hand, models like BETR bring efficiency, objectivity, and consistency to the supervisory process.

On the other hand, they introduce the risk of over-reliance on quantitative, backward-looking data. The 2023 banking crisis was a stark reminder that novel risks can emerge with breathtaking speed in ways that historical data may not predict.

The Chicago Fed’s analysis of the crisis pointed to a unique combination of factors—a business model highly concentrated in a specific, volatile sector (venture capital and crypto) combined with acute interest rate risk—that a model trained on past crises might not have flagged as a top-tier threat until it was too late.

This underscores the irreplaceable role of experienced examiner judgment. The true art of supervision lies in balancing the efficiency of model-driven analysis with the forward-looking, qualitative “what if” questions that only a human expert can ask.

The CAMELS Rating System

At the conclusion of an examination, the supervisory team’s findings are distilled into a confidential “report card” for the institution. This grading system, known as CAMELS, is the cornerstone of bank safety-and-soundness supervision in the United States.

It provides a standardized framework for assessing a bank’s condition and is used by all federal banking agencies to ensure a uniform approach to oversight.

The Uniform Financial Institutions Rating System

The rating system was first adopted in 1979 on the recommendation of the Federal Financial Institutions Examination Council (FFIEC), an interagency body that promotes uniformity in bank supervision.

It was originally known as CAMEL, an acronym for the five components it evaluated: Capital adequacy, Asset quality, Management, Earnings, and Liquidity.

In 1997, the system was updated to add a sixth component, “S” for Sensitivity to Market Risk, officially changing the acronym to CAMELS. This addition reflected the growing importance of managing the risks posed by fluctuations in interest rates and other market prices.

More recently, in a move to enhance consistency across the financial sector, the National Credit Union Administration (NCUA) also moved to adopt the full CAMELS framework for the credit unions it supervises.

A crucial feature of the CAMELS rating system is its confidentiality. The ratings are shared only with the bank’s senior management and board of directors and are not released to the public. This is done to prevent a downgrade from triggering a panic and a potential run on the bank by depositors.

How CAMELS Works

Examiners assign a numerical rating from 1 (the best) to 5 (the worst) for each of the six individual components. They then assign a single composite rating for the institution as a whole.

This composite rating is not a simple mathematical average; it is a holistic assessment that gives special consideration to the strength of the bank’s management.

A composite rating of 1 or 2 signifies that the institution is fundamentally sound and of little supervisory concern. A rating of 3 indicates that some weaknesses are present that require more than normal supervisory attention.

Ratings of 4 or 5 are reserved for institutions with serious deficiencies that pose a threat to their viability and require urgent corrective action.

While all six components are critical, the “M” for Management holds a unique and powerful position. It is often the most influential and, by its nature, the most subjective part of the rating.

Analysis from the Bank Policy Institute, an industry group, suggests that examiners place, on average, a 50% weight on the Management component when determining the overall composite rating. This gives supervisors immense discretion.

The “M” rating is where intangible but crucial factors like the quality of a bank’s risk culture and the effectiveness of its board oversight are assessed.

However, this subjectivity has also made the “M” rating a source of controversy and a focus of recent reform efforts. Critics argue that it can be used to penalize banks for issues that are not tied to concrete financial risks, such as “reputational risk,” or to enforce unwritten regulatory expectations.

The wave of proposed regulatory changes in 2025, which aim to refocus supervision on “material financial risks” and prohibit the use of reputational risk in examinations, is a direct response to these concerns.

This has sparked a fundamental debate over the nature of supervision: is the subjective “M” rating a vital tool that allows experienced examiners to make holistic judgments about a bank’s safety, or is it a potential vehicle for regulatory overreach that lacks clear, objective standards?

Protecting Consumers and Communities

The Federal Reserve’s supervisory responsibilities extend far beyond the technical analysis of a bank’s financial health. A significant portion of its mission is dedicated to ensuring that banks treat their customers fairly and serve the needs of their local communities.

This work directly impacts the financial lives of millions of Americans.

Enforcing Consumer Protection and Fair Lending Laws

A dedicated group of Consumer Affairs examiners within the Federal Reserve is tasked with evaluating whether the state member banks under its jurisdiction are complying with a wide range of federal consumer protection laws.

This is a critical function that helps ensure a level and fair playing field for consumers in the financial marketplace.

Examiners check for compliance with fair lending laws, which prohibit discrimination on the basis of age, race, sex, religion, or marital status. The core principle is that loan applications must be judged solely on the applicant’s financial capacity and creditworthiness, their ability to repay the loan, and not on prohibited personal characteristics.

Examiners also verify that banks are complying with disclosure laws, such as the Truth in Lending Act, which requires that the full cost of borrowing, including interest rates and fees, be clearly and accurately communicated to customers.

For state member banks with assets of $10 billion or less, the Federal Reserve retains primary authority for consumer protection examinations.

To standardize these reviews, supervisors use a dedicated rating system to assess a bank’s Compliance Management System (CMS). This system evaluates how effectively the bank manages its consumer compliance risk.

Similar to the CAMELS system, it uses a 1-to-5 scale, where a rating of 1 indicates a strong and effective system, and a rating of 5 indicates a critically deficient system that demonstrates a lack of willingness or ability to comply with consumer protection laws.

The Community Reinvestment Act

In addition to enforcing consumer protection rules, Fed supervisors are also responsible for evaluating a bank’s performance under the Community Reinvestment Act (CRA) of 1977.

The CRA was enacted to combat “redlining,” a discriminatory practice where banks would refuse to make loans in certain neighborhoods, typically those with high concentrations of minority residents.

The law encourages banks to actively meet the credit needs of their entire communities, including low- and moderate-income (LMI) neighborhoods, consistent with safe and sound operations.

During a CRA examination, supervisors assess a bank’s record of lending, investment, and services in LMI areas within its designated community. Based on this review, the bank is assigned one of four public ratings: “Outstanding,” “Satisfactory,” “Needs to Improve,” or “Substantial Noncompliance.”

These ratings are important, as they are taken into consideration when a bank applies for mergers, acquisitions, or branch expansions.

The CRA, however, is a frequent flashpoint for intense political and policy debate. The interpretation of what it means to “meet community credit needs” is not static; it evolves and can change dramatically with different presidential administrations.

This was starkly illustrated in 2025, when the federal banking agencies, under new leadership, issued a joint proposal to rescind a major CRA final rule that had been issued in 2023.

One administration might seek to expand the scope of the CRA to include activities related to climate change or other social goals, while another may argue for refocusing the act strictly on its original anti-redlining mission.

Federal Reserve supervisors are on the front lines of implementing these shifting policy priorities, making their CRA examinations a highly sensitive and politically charged aspect of their work.

Enforcement and Corrective Actions

When Federal Reserve examiners identify deficiencies at a financial institution, their findings are not mere suggestions. They have a range of tools at their disposal to compel a bank’s management and board of directors to take corrective action.

These tools exist on a ladder of escalating severity, from informal nudges to formal, legally binding orders and significant financial penalties.

The Escalation of Supervisory Pressure

The process of compelling change typically begins with the formal examination report. Within this report, supervisors will detail specific issues in sections often labeled as “Matters Requiring Attention” (MRAs) or similar terms.

These findings put the bank’s board and management on formal notice that specific weaknesses—whether in loan underwriting, liquidity management, or internal controls—must be addressed. The bank is then expected to develop and implement a plan to remediate these issues.

Informal vs. Formal Actions

If the problems are less severe or if management is cooperative, supervisors may opt for an informal enforcement action. The most common of these is a Memorandum of Understanding (MOU).

An MOU is a non-public agreement between the bank’s board of directors and the Federal Reserve, in which the board commits to addressing the identified deficiencies. While not as severe as a formal action, it is a clear signal that supervisory patience is wearing thin.

However, for more serious violations of law, unsafe or unsound practices, or a failure to address previously identified problems, the Fed will escalate to formal enforcement actions.

These actions are generally public documents and are legally enforceable in court. The primary types of formal actions include:

Written Agreements and Cease and Desist Orders: These are legally binding documents that require the institution to take specific corrective steps and to stop engaging in harmful practices. A cease and desist order is typically more severe and can be issued without the consent of the bank.

Civil Money Penalties (CMPs): These are monetary fines that can be assessed against the institution itself or against individuals affiliated with the bank, such as officers, directors, or employees. These penalties are used to punish misconduct and deter future violations.

The Federal Reserve maintains a public record of its formal enforcement actions, providing a degree of transparency into its supervisory activities.

Holding Individuals Accountable

In the most egregious cases of misconduct or breach of fiduciary duty, the Fed has one of its most powerful enforcement tools: the ability to hold individuals directly accountable.

Supervisors can initiate removal and prohibition orders, which permanently bar an individual from working in the banking industry. This authority is a potent deterrent against misconduct by bank insiders.

A review of the Fed’s enforcement actions in 2025 shows numerous instances of prohibition orders being issued against former bank employees for actions such as embezzlement of bank funds or misappropriation of customer funds.

Crisis, Criticism, and Reform (2023-2025)

The period between 2023 and 2025 marked a watershed moment for Federal Reserve bank supervision. A series of dramatic bank failures triggered intense public and congressional scrutiny, leading to critical internal and external reviews.

This, in turn, set the stage for a profound philosophical and political shift in the very definition of what bank supervision should be, a debate that continues to shape the future of financial regulation.

Lessons from the 2023 Bank Failures

In March 2023, the sudden collapse of Silicon Valley Bank (SVB), followed quickly by Signature Bank and others, sent shockwaves through the financial system. The failures represented the most significant banking turmoil since the 2008 crisis and immediately put the effectiveness of Federal Reserve supervision under a harsh microscope.

The Fed’s own internal review of the SVB failure, released in April 2023, was remarkably candid. It acknowledged that Fed supervisors had identified critical weaknesses at the bank—including inadequate interest rate risk and liquidity risk management—well before its collapse.

However, the report concluded that supervisors “did not take sufficient forceful action” to ensure the bank remediated these problems in a timely manner.

Deeper analysis, such as a working paper from economists at the Federal Reserve Bank of Chicago, offered a more nuanced diagnosis. It argued that the crisis was not simply a story of mismanaged interest rate risk, but rather a failure of a specific and novel business model.

SVB, Signature, and other affected banks had built their franchises around serving the highly concentrated and volatile venture capital and crypto-asset sectors. This led to an extremely high level of uninsured deposits from a narrow and highly correlated depositor base.

When these tech sectors came under pressure in 2022, the banks’ funding proved to be exceptionally fragile. This perspective suggests that effective supervision must go beyond checking generic financial ratios and analyze the strategic vulnerabilities of a bank’s chosen business model.

The Government Accountability Office Weighs In

In November 2024, the U.S. Government Accountability Office (GAO), the investigative arm of Congress, released a report that identified significant and long-standing weaknesses in the Federal Reserve’s process for escalating supervisory concerns.

The GAO’s key findings were stark:

The Federal Reserve had failed to issue a regulation or enforceable guidelines on corporate governance and risk management, despite having the legal authority to do so under the Federal Deposit Insurance Act. The GAO stated this failure “may have contributed to delays in taking more forceful action against Silicon Valley Bank.”

The Fed had also not finalized a rule required by the 2010 Dodd-Frank Act, which was intended to promote earlier remediation of problems at financial institutions. Although Fed officials claimed other rules accomplished much of the same goal, the GAO found that substantive items remained unimplemented.

The GAO concluded that by failing to implement these requirements, the Federal Reserve’s supervisory tools were not aligned with congressional intent, which was to empower regulators to take early and decisive action before a bank’s problems could threaten its solvency.

The 2025 Push for “Better Bank Supervision”

Following a change in presidential administration, a dramatic and coordinated shift in supervisory philosophy began to take shape across the Federal Reserve, FDIC, and OCC in 2025.

Press releases, speeches, and news reports from this period reveal a concerted effort to overhaul the supervisory framework that had been in place since the 2008 crisis.

The core principles of this new approach, often framed under the banner of “better bank supervision,” included:

Refocusing on “Core and Material Financial Risks”: A move to concentrate examinations on quantifiable risks to a bank’s financial condition, such as capital and liquidity, and to de-emphasize more process-oriented or qualitative reviews.

Eliminating “Reputation Risk”: A proposal to prohibit supervisors from using the vague and subjective concept of “reputational risk” as a basis for issuing corrective actions.

Implementing a “Pragmatic and Tailored” Approach: Fed Vice Chair for Supervision Michelle Bowman stated that the Fed would no longer use horizontal exams to “grade on a curve” and would stop holding every bank to the “best practices of another bank”, instead tailoring supervision to specific business models.

Withdrawing Previous Guidance: The agencies took steps to withdraw or rescind prior guidance and rules on a range of topics, including principles for managing climate-related financial risk, joint statements on crypto-assets, and the 2023 Community Reinvestment Act final rule.

This sweeping set of reforms represents a fundamental pendulum swing in the ongoing debate over the proper purpose and scope of bank supervision.

The post-2008 regulatory consensus, largely codified in the Dodd-Frank Act, had expanded the Fed’s powers to address a broader range of risks, including those that were difficult to quantify but could pose a threat to financial stability. The 2023 bank failures were seen by many, including the GAO, as a failure to use those expanded powers effectively.

The new philosophy articulated in 2025, however, offers a different diagnosis. Its proponents argue that the supervisory framework itself had become too expansive, burdensome, and politicized, straying from its core mission of ensuring basic financial soundness and becoming a tool for advancing other policy goals.

The counter-argument, voiced by critics, is that this “refocusing” is in fact a dangerous “hollowing out” of the supervisory agencies’ authority, one that weakens oversight, rolls back critical protections, and, in the words of one U.S. Senator, “paves a gold-plated road to the next financial crisis.”

This central conflict—between a broad, precautionary approach to supervision and a narrower, more quantitatively focused one—is the defining issue for the Federal Reserve’s supervision staff today. The outcome of this debate will have profound implications for the safety and stability of the U.S. financial system for years to come.

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