Overview
Several large banks have been pressing the Federal Reserve behind closed doors to make its recent supervisory changes more durable, according to four people with direct knowledge of those discussions. The lobbying effort seeks to secure legal clarity around a pivot by regulators away from broad use of "matters requiring attention" - the confidential supervisory tool that historically compelled banks to remediate identified weaknesses - and toward the revival of "observations," a nonbinding informal flag that examiners previously used.
What banks are seeking
Banking industry representatives want the Fed to explicitly address legal ambiguity linked to the softer approach and to provide formal assurances that observations will not be elevated to MRAs except where the facts around a matter change materially. Sources who described private conversations with Fed officials said lenders believe that putting such commitments in writing - and revising public guidance - would offer long-term protection should future policymakers seek to reverse the current course.
Regulatory changes underway
Under the direction of the Fed's Vice Chair for Supervision, Michelle Bowman, the agency has sharply curtailed the routine deployment of MRAs, reserving them for material financial risks. Instead, the Fed has begun to lean again on observations, a tool it had discontinued in 2013. A February memo noted the Fed may downgrade some existing MRAs to observations. While MRAs can lead to enforcement actions and monetary penalties if a firm fails to address the cited problem, observations are nonbinding and generally used to notify management of issues without immediate enforcement leverage.
Fed officials have signaled that they will amend public documentation from 2013 to provide additional clarity on observations. Separately, Bowman's team has published new operating principles for examiners intended to make changes to supervisory practice more transparent - even though such published principles do not carry the legal force of formal rulemaking.
Why banks want formal clarity
Industry participants applaud the shift away from what they describe as an excessively punitive, detail-focused supervisory culture that generated many MRAs for relatively minor shortcomings. Banks argue this environment diverted management attention away from assessing and addressing more significant risks. They point to supervisory reviews of Silicon Valley Bank, which found the bank had 19 open MRAs at the time it failed, and contend many of those MRAs did not relate to the core failures that precipitated the collapse.
Despite welcoming the softer stance, bankers fret that observations are legally vague. They are particularly concerned that a future Democratic-led Fed might interpret nonbinding observations as grounds to reissue MRAs or escalate oversight if supervisors conclude a bank did not act, even absent new facts. To guard against that possibility, banks are urging the Fed to produce written language clarifying when and how an observation can become an MRA.
Institutional and political dynamics
Those advocating for the supervisory pullback argue that reducing red tape and focusing examiners on material risks will free up capital and support lending. The push to formalize changes aligns with broader Republican policy aims at the Fed, and could accelerate under a Fed led by Kevin Warsh, whom the White House has signaled as its preferred chair.
Implementation of formal regulatory changes would require rulemakings put to a vote by the Fed's board. While Republicans currently hold the majority, the Fed has historically sought consensus, and board Democrats are expected to dissent on moves that would enshrine the retreat from conventional supervisory practice. Legal experts cited by sources said codifying the supervisory rollback into formal regulation would make it more difficult to reverse, but that the board-level approval process presents a potential constraint.
In parallel with narrowing MRAs, Fed officials and other bank supervisors have scaled back both the number and scope of bank examinations and proposed an overhaul of the confidential bank rating system. Bowman has also announced plans to reduce supervision headcount by roughly 30 percent, prompting the departure of long-tenured staff and the hiring of new personnel aligned with current leadership priorities.
Transparency and permanence
Proponents of the changes have sought to reduce the opacity that traditionally surrounds supervisory work. They argue that publicizing operating principles and other elements of the examination process raises the political and legal cost of reversing the approach later, because future officials would have to justify a shift away from published practices. One source involved in the discussions described the publication of these principles as a step to make the supervisory adjustments more durable, even if the guidance itself does not carry binding legal authority.
Observers and some legal scholars believe the combination of published principles and staff turnover will make a wholesale return to the prior supervisory culture more difficult. University of Michigan law professor Jeremy Kress is quoted by sources as saying the shifts could have staying power, particularly as experienced examiners leave the agency, making it harder for a future Vice Chair for Supervision to quickly reverse course.
Counterarguments and political pushback
Critics within Democratic circles argue these changes weaken safeguards at a vulnerable time for the global economy. They warn that narrowing enforcement tools and reducing supervision staffing could leave the system less prepared to detect and address emerging risks. Some bank executives themselves expect a political backlash should Democrats regain the White House in 2028 and seek to rebuild a more interventionist supervisory framework.
Todd Baker, a senior fellow at the Richman Center for Business, Law and Public Policy at Columbia University, framed Bowman's agenda as an attempt to "alter the supervisory culture of the Fed and to shift the power balance - in favor of bank management." Bowman has defended the revisions by saying supervisors have been distracted by cataloging minor missteps - "footfaults" - and that the goal is to concentrate their efforts on real financial risks rather than tripping up institutions for trivial issues. A Fed spokesperson declined to comment on the private discussions described by the industry sources.
From the White House, a spokesperson said the administration is focusing on "objective and measurable risks" to financial markets, reflecting the stated rationale for the supervisory adjustments.
Legal and procedural hurdles
Legal experts engaged by sources note that making the changes permanent through formal rulemaking would raise the bar for any future reversal. But any such rulemaking would require approval from the Fed board, where achieving consensus has historically been a priority. With board Democrats likely to object to formalizing a retreat from routine MRAs, the path to codification remains uncertain.
Conclusion
Banks' outreach to the Fed underscores their desire to entrench the current softer supervisory posture and reduce the risk of a future reversion to heavier-handed oversight. The effort to clarify how observations will operate relative to MRAs - and to publish examiner operating principles - reflects a broader push to institutionalize changes in supervision even as political dynamics and agency procedures could complicate a formal, binding entrenchment of those reforms.
Key Points
- Wall Street banks are pushing the Fed to formally clarify and potentially codify a move away from routine use of MRAs toward nonbinding observations, seeking written assurances that observations will not be escalated unless facts materially change - impacts banking sector oversight and regulatory compliance.
- The Fed's supervisory leadership under Vice Chair Michelle Bowman has curtailed MRAs, revived observations, proposed changes to the confidential rating system, scaled back exams and plans to reduce supervision headcount by roughly 30 percent - affecting supervision operations and bank risk-management practices.
- Political and board-level dynamics complicate efforts to enshrine the changes: formal rulemakings would require Fed board votes and could provoke dissent from Democrats, with implications for regulatory certainty across the financial sector.
Risks and Uncertainties
- Legal Ambiguity - Observations are nonbinding, and banks fear future Fed leadership could reinterpret them as grounds to reinstate MRAs, creating regulatory uncertainty for institutions and potentially affecting lending behavior and market confidence.
- Political Backlash - If Democrats regain the White House or exert influence over the Fed, they may try to reverse the supervisory rollback, raising the prospect of swings in regulatory policy that could unsettle bank planning and capital allocation.
- Operational Risk - A 30 percent reduction in supervision staff and the departure of long-tenured examiners could weaken institutional knowledge and hamper regulatory oversight, with consequences for early detection of systemic or firm-specific risks.