Bowman Warns that Bank Supervision Has Drifted from Its Core Purpose
Federal Reserve Governor Miki Bowman pointed to a troubling trend in recent supervisory ratings in an appearance earlier this week at an American Bankers Association conference. She highlighted findings from the Board’s latest Supervision and Regulation Report, which showed that only one-third of large financial institutions maintained satisfactory ratings across all components in the first half of 2024 — even as most met capital and liquidity expectations.
“The odd mismatch between financial condition and overall supervisory condition… raises a more significant issue,” Bowman said. “Are ratings trends based on the materiality of the identified issues, or do they imply that the regulators see widespread fragility in the banking system?”
Bowman stated that banking supervision has drifted from its core purpose — assessing financial risks — to an overemphasis on non-financial factors like IT systems, operational risk, governance and internal controls. While these are important, she warned that they “should not come at the expense of more material financial risk considerations — and they should not drive the overall assessment of a firm’s condition.”
She also raised concerns about how anti-money laundering compliance is factoring into bank ratings.
“I am concerned that the [BSA/AML] framework is being used to downgrade a bank’s condition based on a disproportionate weighting of its compliance with these requirements in comparison to its overall condition.”
Why It Matters:
- Regulatory inconsistencies: Supervisory ratings that do not align with financial health raise questions about how decisions are made.
- Risk of uniformity: Supervisory practices like horizontal reviews create incentives for banks to conform to a single model, discouraging competition and innovation. Bowman stated, “We should also not expect every firm to coalesce around a single set of products, internal processes, and risk-management practices.”
- Real-world consequences: A low supervisory rating can limit M&A opportunities, raise liquidity costs, and divert resources from key management priorities — even when a bank is financially sound.
Five Key Things
1. Trump Administration Steps Up Oversight of Independent Federal Agencies and Targets Unlawful and Harmful Regulations
President Trump reinforced his Administration’s stance on regulatory oversight and efficiency by issuing two sweeping executive orders this week.
- The first order, issued Tuesday, mandates all executive departments and agencies, including independent regulatory agencies like the federal banking agencies, to submit proposed and final “significant regulatory actions” and strategic plans to the Office of Information and Regulatory Affairs within the Office of Management and Budget for review prior to finalization. It also:
- Requires the heads of independent agencies to appoint a White House Liaison;
- Empowers the OMB Director to establish performance standards for independent agency leadership and oversee budgetary allocations; and
- Clarifies that the President and the Attorney General hold the ultimate authority in interpreting federal law within the executive branch, with all employees required to adhere to their legal determinations.
While the monetary policy functions of the Federal Reserve remain exempt, the order explicitly applies its provisions to the Federal Reserve’s supervisory and regulatory authority over financial institutions.
- The second order, issued Wednesday night, directs all agencies – including the federal banking agencies – to identify, in collaboration with the Attorney General and the Department of Government Efficiency, all regulations that could potentially violate the law, harm national interest or have significant costs that outweigh the public benefit. Agencies must submit a list of such regulations to OMB within 60 days, which will help to form a “Unified Regulatory Agenda.” Additionally, the order directs agencies to deprioritize the enforcement of unlawful regulations.
2. Barr Reflects on Regulatory Tenure, AI Risks and Debanking Claims in Farewell Tour
As he prepares to step down on February 28 from his Vice Chair for Supervision role, Federal Reserve Vice Chair for Supervision Michael Barr held a farewell tour spanning multiple public appearances this week to reflect on his regulatory priorities, reject debanking concerns and highlight the emerging risks of artificial intelligence in finance.
- Debanking Claims Unfounded: During an appearance at the Council on Foreign Relations, Barr said the claims of widespread “debanking” of Republicans — an allegation leveled by President Donald Trump and others — are unfounded. “I haven’t seen any evidence of that kind of activity,” Barr stated. He also said that banks are voluntarily closing accounts of customers they suspect are engaged in illegal activity. He described the practice as “appropriate risk management.”
- Barr also pushed back against the idea that supervisors have attempted to discourage banks from doing business with companies and individuals that deal in cryptocurrencies. He said the Fed has taken steps to help banks that wish to engage in novel activities and some just do it better than others.
- Balancing Efficiency and Risk with AI: Barr cautioned that while AI can enhance efficiency and decision-making, it also could pose systemic risks if not properly managed. He warned that AI-driven trading could lead to “herding behavior and concentration of risk,” thus amplifying volatility. He also pointed to regulatory blind spots, noting that AI adoption — especially by nonbanks — could push financial activity into less-regulated sectors.
Defending His Regulatory Legacy
In a speech at Georgetown University, Barr reiterated his support for higher capital requirements and opaque stress testing. While Barr will continue to serve out his term as a Fed Board Governor, he confirmed during the Q&A session that he will no longer serve on the Committee on Supervision and Regulation. Here are some highlights:
- Basel III Endgame. Barr urged regulators to finalize the Basel III endgame reforms and defended the changes he outlined last fall, stating that “these reforms had broad consensus on the Board” and among regulators, despite bipartisan criticism of the proposal.
- Opaque Stress Testing. Barr dismissed calls for greater transparency, instead insisting that stress tests remain “dynamic and unpredictable.” He repeated a misguided narrative that increased disclosure could lead to banks “gaming the test.”
- Liquidity Requirements. Barr noted the importance of bank preparedness to borrow from the Fed’s discount window and being able to monetize securities quickly and further suggested updating assumptions about deposit outflows to ensure that liquidity regulations reflect real-world risks.
- Long-Term Debt. Barr urged moving ahead with regional bank long-term debt requirements, even suggesting a draft rule reflecting comments received has already been prepared at the Fed: “The banking agencies have proposed a rule on long-term debt requirements, we have received many helpful comments that led us to adjust it in draft form, and I support moving forward to finalize it with those adjustments.”
- Nonbanks. Barr noted the importance of monitoring vulnerabilities in nonbank financial institutions, pointing to their role in market stability and the need for continued regulatory attention in this area.
- Cybersecurity. Barr identified cyber threats as a major concern, exacerbated by dependencies on large technology providers and advances in AI. He recommended cyber resiliency investments from both banks and the Federal Reserve.
- Climate Risk. While acknowledging throughout his speech the need for regulators to “be humble about [their] ability to predict shocks to the financial system,” Barr reiterated misguided concerns on the need for regulators to confront financial risks stemming from climate change.
3. Administration Sends Mixed Signals on Bank M&A
The Trump administration’s approach to bank mergers and acquisitions remains unclear, as regulators send contradictory signals on antitrust review and enforcement.
- Acting Comptroller Calls for Streamlined Process. Acting Comptroller of the Currency Rodney Hood advocated for a more streamlined bank merger approval process in a speech this week at an American Banker conference, according to American Banker. Hood remarked that the current bank merger review process fails to account for competition within the financial services industry, including from digital banking and nonbanks. He announced plans to engage the Department of Justice to revise the Herfindahl-Hirschman Index, a key metric used to evaluate market concentration. Hood believes that a more comprehensive evaluation method could prevent unnecessary delays in merger approvals.
- DOJ and FTC Plan to Follow Biden Guidelines. In a memo to DOJ staff, Acting Assistant Attorney General Omeed Assefi confirmed that the Antitrust Division will continue using the Biden Administration’s 2023 Merger Guidelines. FTC Chair Andrew Ferguson echoed this stance, warning that frequent changes to merger guidelines would undermine regulatory stability. Additionally, DOJ antitrust nominee Gail Slater has indicated she will “follow the legal and economic framework described in the 2023 Merger guidelines.”
This mixed messaging leaves banks uncertain about the future of competitive reviews of bank M&A transactions, with potentially conflicting standards being applied by each agency. While the administration publicly supports reducing regulatory burdens, federal enforcers are keeping strict merger scrutiny intact. Given the multiple federal agencies involved in competitive reviews of bank mergers, consistency — and ideally, simplification — would provide the predictability and efficiency that is currently lacking in bank M&A regulatory reviews.
4. Financial Groups Push for Regulatory Reform to Bolster U.S. Digital Asset Competitiveness
BPI and a coalition of financial trade associations are urging regulators to remove barriers hindering banks’ ability to fully engage in digital assets, warning that current policies are stifling U.S. competitiveness.
In a joint letter, the groups expressed support for the President’s Working Group on Digital Asset Markets but cautioned that restrictive policies from the Federal Reserve, FDIC and OCC have discouraged banks from offering legally permissible activities using distributed ledger technology. The letter also calls for greater involvement of banking regulators in shaping digital asset policy.
5. Europeans Lean into “Simpler the Better”
The European Commission and the European Central Bank are looking to increase global competitiveness by simplifying regulations, reducing administrative burdens and improving overall efficiency.
- The European Commission adopted its 2025 Work Program last week, which serves as a roadmap for how to implement some of the many reforms outlined in The Draghi Report on EU Competitiveness. The plan hopes to generate:
- A “more integrated capital market” that could raise an additional €470 billion in funding for E.U. companies;
- An annual savings of €37.5 billion for EU companies; and
- 500,000 new jobs by 2030.
- The European Central Bank is also introducing a fast-track approval process for simple securitizations that involve significant risk transfers, aiming to accelerate reviews while maintaining financial stability.
Banks use securitization to package and sell loans to investors, which helps free up capital and reduce risk exposure. By transferring credit risk to third parties, banks can lower the amount of capital they must hold as a buffer against potential losses, allowing them to lend more. However, regulators must confirm that a significant portion of the risk is genuinely offloaded (hence the name significant risk transfer), a process that currently takes about three months. The new fast-track system seeks to shorten this timeframe — but only for transactions that meet strict standards.
The ECB stated that it would continue to scrutinize complex securitizations. Additionally, the ECB recommended additional reporting and disclosure for nonbanks to better understand the “interconnections stemming from securitization.”
The new fast-track process will be tested in early 2025 in collaboration with the European Banking Federation.
In Case You Missed It
Senate Banking Prepares CFPB Nomination Hearing
The Senate Banking Committee is set to hold a February 27 hearing for Jonathan McKernan, President Trump’s nominee to lead the Consumer Financial Protection Bureau. The hearing will also include Stephen Miran, nominated to chair the Council of Economic Advisers, and Bill Pulte, tapped to lead the Federal Housing Finance Agency.
Senator McConnell Announces Retirement; Rep. Andy Barr Announces Interest
Senator Mitch McConnell (R-KY) announced this week that he will not seek re-election when his current term expires. Shortly after Sen. McConnell made the announcement, Rep. Andy Barr (R-KY) stated that he was “considering running for Senate” and would “be making a decision … soon.” Rep. Barr is currently Chair of the House Subcommittee on Financial Institutions and Monetary Policy.
Judge Upholds Section 1071, CFPB’s Small Business Data Collection Rule
A federal judge recommended upholding a CFPB small business data collection rule, known as Section 1071, reaffirming the agency’s authority under the Dodd-Frank Act, according to American Banker. The regulation requires lenders to gather demographic data — including race, ethnicity, and gender — on small business loan applicants as part of its fair lending oversight.
Lenders have voiced concerns over the rule, citing compliance costs, potential disruptions to small-business lending and data accuracy issues. For example, in some circumstances, the rule would require banks to determine and report a business owner’s race and ethnicity based on a visual observation or surname. However, the court determined that the CFPB acted within its statutory mandate in implementing the regulation.
NIST Advances Cyber AI Profile Development, Seeks Industry Input
The National Institute of Standards and Technology published a concept paper late last week outlining plans to develop an AI profile for its Cybersecurity Framework. The NIST framework provides guidelines and best practices to help market participants identify and mitigate cyber risks and aligns with industry-led initiatives, such as those from the Cyber Risk Institute. NIST is currently accepting public comments until March 14 and will host a Cyber and AI Workshop on April 3.
The Crypto Ledger
Here’s the latest in crypto.
- SEC Launches Cyber and Emerging Tech Unit: The Securities and Exchange Commission launched the Cyber and Emerging Technologies Unit (CETU) to address fraud and misconduct stemming from emerging technology. Led by Laura D’Allaird, CETU consists of approximately 30 fraud specialists and attorneys across multiple SEC offices. CETU will “complement the work” of the existing Crypto Task Force, led by Commissioner Hester Peirce.
- FSB Reviews Global Crypto Regulations and Stability Risks: The Financial Stability Board has launched a “thematic peer review” to assess how jurisdictions are implementing its global regulatory framework for crypto-asset activities. The review will examine the effect of national regulations on crypto firms, compliance challenges and evolving financial stability risks. The FSB is also accepting stakeholder feedback, with comments due by March 28. The final report is expected in October 2025.
- ECB Moves to Integrate Central Bank Money with DLT Settlement: The European Central Bank is developing ways to settle distributed ledger technology-based transactions using central bank money. The plan includes first linking with existing financial market infrastructures and later creating a fully integrated solution, including cross-border transactions. This initiative builds on exploratory work conducted in 2024 and aligns with the ECB’s goal of promoting a digital capital markets union.
- Chainalysis: Sanctioned Nations Turn to Crypto: A new report from blockchain analytics firm Chainalysis finds that U.S.-sanctioned countries—including Iran, Russia, and North Korea—are increasingly using crypto to evade restrictions. The report estimates that “sanctioned jurisdictions and entities received $15.8 billion in cryptocurrency in 2024, accounting for about 39% of all illicit crypto transactions.”
- FTX Begins Repaying Creditors: FTX has begun repaying creditors, beginning with claims under $50,000. The first distribution occurred on February 18, with subsequent payments scheduled for April 11 and May 30. The bankruptcy estate expects most creditors to receive 118% of their claims, funded through asset sales and clawbacks. However, many customers remain frustrated as payouts are based on November 2022 valuations, when crypto prices were low.
- Synapse Under Grand Jury Investigation: A grand jury is investigating potential misconduct at fintech firm Synapse, which collapsed in April 2024 after $96 million in customer funds went missing. The WSJ reports that a senior director had alerted accountants to a multimillion-dollar shortfall prior to the collapse.
BPI Job Bank
Upcoming Events
- 2/25/2025: Yale Program on Financial Stability Hosts Discussion with Vice Chair for Supervision Michael Barr
- 2/26/2025: Senate Banking Hearing – Exploring Bipartisan Legislative Frameworks for Digital Assets
- 2/26/2025: House Financial Services Hearing – The Future of American Capital: Strengthening Public and Private Markets by Increasing Investor Access and Facilitating Capital Formation
- 2/27/2025: Alliance for Innovative Regulation Hosts “Fireside Chat: Driving Responsible Innovation: A Discussion with Vice Chair for Supervision Michael Barr”
- 2/27/2025: Senate Banking Hearing – Nominations of McKernan, Miran, Kessler, Pulte
- 2/27/2025: Columbia University SIPA/BPI Bank Regulation Research Conference
