Federal Reserve Outlines Major Shift in Supervisory Operating Principles

Key Takeaways

• Clearer Supervisory Communication: MRAs and MRIAs must be written in specific, plain language so a person of ordinary intelligence can understand both the issue and what a non-deficient state looks like.
• More Disciplined Use of Horizontal Reviews: LISCC and LFBO will only conduct horizontal reviews when the Deputy Director determines the benefits to safety and soundness outweigh the costs, with results shared confidentially including peer comparisons.
• Liquidity and Funding Flexibility: Examiners are instructed not to discourage firms from considering Federal Home Loan Bank liquidity in stress testing or daily management, and may not require pre-positioning at the discount window as a condition for future borrowing.
• Balanced Supervisory Ratings: Composite ratings must reflect all CAMELS and RFI/C(D) components, with management and risk management no longer outweighing other elements in determining the overall rating.
• Targeted, Judgment-Driven Supervision: The memo reinforces a system-wide move toward concentrating on material risks, relying on work already performed by primary regulators and internal audit, and avoiding unnecessary duplication.

Deep Dive

The Federal Reserve is reorienting its supervisory approach in a move that Acting Director Mary Aiken and Acting Deputy Director Julie Williams describe as a “significant shift” from past practice. In a memo issued October 29, the leaders of the Division of Supervision and Regulation instructed staff across the Federal Reserve System to align their work with Vice Chair for Supervision Miki Bowman’s updated priorities, an approach that places earlier intervention, clearer communication, and a sharper focus on material financial risks at the center of bank oversight.

The memo makes clear that the era of relying on established routines is over. Staff are told not to assume that long-standing practices should continue simply because they existed before. Instead, examiners are expected to pause and reassess whether their work, conclusions, and messaging match the Vice Chair’s direction and the broader shift in posture. The central idea is straightforward: supervision should intervene sooner, act proportionately, and direct attention where it matters most for the safety and soundness of banking organizations.

A major part of that shift involves trusting supervisors to use their judgment. If examiners encounter an issue that could pose a material risk to a firm’s financial condition, they are expected to escalate it, even when existing tools don’t neatly address the concern. At the same time, they are urged not to lose focus by spending excess time on procedural or documentation issues that do not meaningfully affect a firm’s condition. Lower-level shortcomings will once again be handled through supervisory observations, which the Federal Reserve plans to restore by reversing SR 13-13’s earlier directive to eliminate them.

Relying on Primary Regulators and Streamlining Remediation

The memo also underscores the Fed’s obligations under the Gramm-Leach-Bliley Act. When assessing bank holding companies, savings and loan holding companies, or the U.S. operations of foreign banks, supervisory staff must rely “to the maximum extent possible” on the work of primary state or federal regulators overseeing depository institution subsidiaries, unless reliance is genuinely impossible. A lack of shared information might meet that threshold; differences in supervisory style do not. For state member banks, Federal Reserve examiners are expected to work jointly with state banking agencies and, in alternating-year programs, rely heavily on state examination work.

In closing out deficiencies, the Fed is reshaping how examiners determine whether MRAs, MRIAs, and enforcement action requirements have been fully remediated. If a firm’s internal audit function is rated satisfactory, examiners are expected to rely on its validation rather than conducting repeat testing of their own. Once a deficiency has been corrected, the item should be terminated without delaying the decision to see whether the fix holds over time.

Sustainability, the memo says, should be monitored after termination—if the issue returns, the firm can be held accountable. Examiners are also cautioned not to conduct extra reviews unrelated to the issues that gave rise to the enforcement action in the first place.

Improving Clarity, Reducing Burden, and Refocusing Supervision

Communication is another area that the memo seeks to overhaul. MRAs and MRIAs must now be written in clear, specific language, detailed enough that “a person of ordinary intelligence” can understand both the issue and what a non-deficient state looks like. Supervisory staff are also expected to respond promptly when institutions ask for clarification and remain open to feedback on whether an issue is justified or sufficiently clear.

The memo also curtails the use of resource-intensive horizontal reviews. The LISCC and LFBO portfolios will no longer conduct these reviews unless the Deputy Director determines that the benefits to safety and soundness outweigh the costs. When such reviews do occur, banks will be assessed against supervisory expectations rather than whatever standard happens to represent the best practice within a peer group. The results will be confidentially shared with the participating institutions, including peer comparisons.

Beyond that, the guidance touches on several longstanding supervisory debates. Examiners are told not to discourage firms from considering Federal Home Loan Bank liquidity in their stress testing or daily liquidity management. They also may not require firms to pre-position collateral at the discount window as a condition for future borrowing. Ratings, too, must be adjusted to reflect a balanced view. The management and risk management components of CAMELS and RFI/C(D) ratings should not outweigh other components when determining a firm’s composite rating.

Throughout the memo, it's clearly stated that supervision should concentrate on the risks that matter, rely on the work already performed by primary regulators and internal audit, and avoid duplicating effort unless necessary. As the memo notes, additional guidance is forthcoming on revised standards for issuing MRAs, MRIAs, and enforcement actions based on unsafe or unsound practices.

For now, the Federal Reserve is ushering in a more targeted, judgment-driven supervisory framework, and staff across the system are expected to adjust their work accordingly.

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