Federal Reserve Overhauls Bank Supervision, Prioritizing Material Risks and Proportionality

The Federal Reserve Board has unveiled a significant shift in its bank supervisory approach, issuing a Statement of Supervisory Operating Principles aimed at focusing examiners on material financial risks and ensuring timely, proportionate action. Vice Chair for Supervision Michelle W. Bowman announced the changes, emphasizing a move towards a more effective and less bureaucratic regulatory framework. The initiative has been met with praise from industry figures, including Coinbase Chief Policy Officer Faryar Shirzad.

The new principles, distributed to supervisory leadership and staff, direct examiners to prioritize risks that genuinely threaten the safety and soundness of banks. This includes reducing duplication in examinations, streamlining issue remediation, and reintroducing non-binding supervisory observations for lesser shortcomings. Vice Chair Bowman stated, "Our supervisory approach is not about narrowing our focus—it is about sharpening it," underscoring the goal of strengthening the banking system's foundation.

Faryar Shirzad, Chief Policy Officer at cryptocurrency giant Coinbase, lauded the Federal Reserve's decision. In a recent tweet, Shirzad described the move as an "Important step by the @federalreserve and Vice Chair Miki Bowman to bring proportionality and predictability to supervision." He further asserted that "Years of overreach by the Fed have allowed the supervisory process to become politicized and bureaucraticized. Today’s Statement of Supervisory Operating Principles is welcome reform."

The changes signal a broader effort to recalibrate the regulatory burden on financial institutions, a sentiment often echoed by industry stakeholders. Shirzad's perspective, representing a company in the rapidly evolving and often heavily scrutinized cryptocurrency sector, highlights the desire for clear and predictable regulatory environments. The new framework aligns with calls for supervisors to avoid excessive attention to processes and documentation that do not pose material risks.

However, the Federal Reserve's shift has also drawn scrutiny from some quarters. Critics, including Fed Governor Michael Barr, have voiced concerns that such changes, alongside reported staff reductions, could impair supervisors' ability to act swiftly and effectively. Debates surrounding the "politicization" and "bureaucracy" of the Federal Reserve's supervisory role have been ongoing, with some arguing that mission creep and a lack of political diversity within the institution can undermine its credibility and effectiveness.