Regulatory pressure eased, tone shifted! The Federal Reserve will relax requirements for banks to rectify deficiencies

The Federal Reserve has signaled to the banking industry its plan to abandon certain warnings previously issued to some banks. This move further reflects a shift in the regulatory tone as Federal Reserve Vice Chair Michelle Bowman continues to relax the central bank's oversight of U.S. financial institutions.

According to media reports citing informed sources, earlier this month, the Federal Reserve's regulatory department notified several banks nationwide that examiners would begin re-evaluating unresolved warnings. These warnings are classified as non-public orders requiring banks to rectify existing deficiencies.

If the relevant warnings are inconsistent with the Federal Reserve's latest regulatory focus—which requires examiners to concentrate more on issues that pose direct risks to the financial health of banks, and less on processes and procedures, then the relevant warnings will be withdrawn. Bank executives will have the opportunity to communicate about solutions to the remaining warnings.

This adjustment by the Federal Reserve targets so-called "Matters Requiring Attention" (MRA) and "Matters Requiring Immediate Attention" (MRIA). The latter pertains to urgent directives that require swift action. Such warnings may stem from concerns about various operational issues within banks, including financial condition, cybersecurity preparedness, or succession planning. If problems are identified during routine examinations, the Federal Reserve will still issue such directives, but the triggering threshold will be raised.

A More Lenient Regulatory Framework

Financial regulators appointed by President Trump have promised to ease the complex regulatory framework. Banking professionals believe that the layered rules established since the global financial crisis are overly complicated, increasing costs and suppressing lending, without necessarily enhancing systemic safety. Bowman has committed to a comprehensive reform of the risk oversight approach for institutions and to improving transparency.

According to an internal memorandum from the Federal Reserve reviewed by the media, the purpose of this review is to help regulators "enhance the effectiveness of oversight by focusing on issues that pose substantial financial risks to the safety and soundness of banks."

The memorandum states that the review will ensure that regulatory findings are "based on deficiencies that, if not timely rectified, are likely to cause higher-than-normal levels of damage to the financial condition of the regulated institutions," rather than on general concerns about policies, procedures, or internal controls. Additionally, warnings must be issued in "plain language that is sufficiently specific."

Informed sources indicate that the action to reduce unresolved warnings will be phased, with examiners gradually assessing the situation. Deficiencies or significant risk issues related to consumer protection are not included in this review.

Review Underway

Some informed sources have stated that the review has commenced and will continue until the end of March, with decisions to be made by the end of July. At that time, banks will be required to cooperate with examiners to clarify the corrective measures they have taken or have yet to take regarding risk management, compliance, and financial condition. In certain cases, the Federal Reserve may downgrade compliance warnings to supervisory observations, which no longer require banks to rectify If the warning involves bank holding companies, the Federal Reserve may consult with the federal or state regulators of their subsidiaries.

However, some Federal Reserve governors, including Michael Barr, have warned that relaxing regulations could weaken oversight of large lending institutions on Wall Street.

This review by the Federal Reserve is another initiative for large bank regulators to collaboratively adjust regulatory focus and concentrate more on core financial risks.

In December last year, the Office of the Comptroller of the Currency (OCC) rescinded some penalty measures against Citigroup from a year earlier, indicating that the bank had made progress in improving risk management and compliance.

Additionally, the Federal Deposit Insurance Corporation (FDIC) established a new regulatory appeals department this January as a "final review level for significant regulatory decisions."