BPInsights: March 8, 2025

Lawmakers Call for Fed Supervision Job to Be Filled

Republican members of the Senate Banking Committee and House Financial Services Committee this week urged the Trump administration to fill the Vice Chair for Supervision job at the Federal Reserve. The lawmakers, in a letter to Treasury Secretary Scott Bessent led by Banking Committee Chair Tim Scott (R-SC) and his House counterpart French Hill (R-AR), framed the vacancy as an urgent priority. Filling the role is necessary to accomplish goals such as “unwinding the politicized regulations” issued by the prior administration, ensuring accountability at the Federal Reserve Board and “right-sizing the regulatory and supervisory work of the Board.”

• Timing: Former Vice Chair for Supervision Michael Barr stepped down from the post on Feb. 28. He remains a member of the Board of Governors, but no longer serves on the central bank’s Supervision and Regulation Committee.
• Critical gap: The Fed’s plan to refrain from major rulemakings until the position is filled effectively “stalls major initiatives” such as reevaluating the Basel Endgame proposal and reexamining the supervisory process to prevent unnecessary account closures, the members wrote. “Past gaps and poor leadership” in the supervisory position have led to dysfunction on the Fed’s Board and contributed to previous bank failures, the lawmakers warned.
• Who? Federal Reserve Governor Michelle Bowman, who has garnered the endorsement of community bankers, has been mentioned in media reports as the likely candidate, and a current governor is the only option given there are no vacancies at the Fed. Bowman is a longtime advocate of regulatory tailoring and has emphasized the need to make regulation and supervision more pragmatic and transparent.
• Kudlow interview: In the wake of an interview with Treasury Secretary Scott Bessent, Fox News’ Larry Kudlow said: “Incidentally, it looks like Trump appointee Miki Bowman, who is a member of the Federal Reserve Board, is going to get the nod to become the Fed Vice Chair for bank supervision.”
• Existential question: Members of Congress weighed in this week on the role of Vice Chair for Supervision and whether it is necessary. In February congressional testimony, Fed Chair Powell questioned if the role is necessary and suggested that vesting supervision authority in a single person could be counterproductive. In a Fox interview this week, Rep. Roger Williams (R-TX), a member of the Financial Services Committee, pushed back on that notion that the Fed Chair should handle supervision. “Frankly, we need the position filled, and I think that’s what’s going to happen,” Williams said. He emphasized the importance of delegating, as in the business world: “The CEO, if he’s having to run the business and sell all the widgets, that doesn’t necessarily work … sometimes you need a sales manager to get in there and sell more and do more.” Rep. Mike Lawler (R-NY) also said the supervision role should be filled. “They certainly need a new appointment there,” he said in a media interview. “I don’t think Jay Powell should take on that responsibility himself.” In a podcast interview, Rep. Frank Lucas (R-OK), chair of the Financial Services Committee’s Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity, said “there is an argument to be made that you need a vice chairman of supervision to make the adjustments” to regulations. “And if you just suddenly create a void, how do you get the change implemented in any timely fashion?”

Five Key Things

1. Scott Unveils Bill to Make Supervision More Objective

Senate Banking Committee Chair Tim Scott (R-SC) this week introduced legislation to prohibit bank examiners from using “reputational risk” as the basis for supervisory sanctions. The bill takes aim at the use of subjective, vague supervisory concepts that can lead to unnecessary account closures, an issue at the forefront of a recent Banking Committee hearing. BPI expressed support for the bill.

2. What They’re Saying on Supervision

Subjective standards, focus on the wrong risks and one letter in CAMELS with outsized power: BPI published a factsheet this week outlining insights from policymakers, academics and industry experts on the challenges with bank supervision and potential reforms. Read it here.

3. Bessent Calls for Focused Bank Supervision, Raises SLR Concern

In a speech on Thursday, Treasury Secretary Scott Bessent called for bank regulators to focus on material financial risks in supervision rather than box-checking exercises. “Our financial regulatory agenda must start with a fundamental refocusing of supervisors’ priorities,” Bessent said. “Leadership must drive a culture that focuses on material financial risk rather than box checking.” He outlined plans to “drive change in [the] regulatory environment” through the Financial Stability Oversight Council, an interagency body headed by the Treasury Secretary, and the President’s Working Group on Financial Markets.

• Coordination, not consolidation: “We need our financial regulators singing in unison from the same song sheet,” Bessent said. “To be clear, this does not mean consolidation of agencies, but coordination via Treasury, such that our regulators work in parallel with each other and industry.” This clarification follows media reports that the administration had been considering consolidating or restructuring the banking agencies.
• Supervisory failure: Bessent characterized the supervisory failures of the 2023 banking turmoil as a “wakeup call” to rethink supervision.  
• SLR: Regulatory and supervisory challenges have hampered large banks’ role as financial intermediaries, Bessent said. “Our nation’s largest banks’ role as financial intermediaries has been weighed down by unduly burdensome regulatory requirements and a broken supervisory culture,” he said. “Backward-looking policies in response to an undercapitalized system predating the Global Financial Crisis almost two decades ago should not drive today’s approach.” He called for a thorough look at the enhanced supplementary leverage ratio, noting the adverse effects on Treasury holdings when the ratio becomes a binding constraint. “Some have suggested that risk-free exposures, like central bank reserves and short duration Treasuries, should not be capitalized even under a risk-insensitive leverage capital restriction, while others have suggested an adjustment to the leverage restriction buffer,” Bessent said. “I do not stand here today making a specific policy announcement – only to make the point that rigorous analysis must be applied to these regulations if we are to appropriately supervise and regulate our banks.”

4. Senate Banking Committee Advances McKernan CFPB Nomination

The Senate Banking Committee this week voted to advance the nomination of Jonathan McKernan, a former FDIC board member, to lead the Consumer Financial Protection Bureau. The vote was 13-11 along party lines.

5. FDIC Moves to Rescind M&A Policy Statement, Withdraws Other Measures

The FDIC this week approved a proposal to rescind a 2024 bank M&A policy statement that would have generated significant uncertainty in the already-fraught bank merger application process including by adding extra-statutory requirements. The agency’s move to reverse the policy statement was meant to address such concerns. The FDIC will reinstate its 1998 M&A policy statement that was in place prior to the 2024 statement but “expects to request comment on all aspects of the regulatory framework governing the FDIC’s review of bank merger transactions in connection with a future proposal to comprehensively revise its merger policy.”

• Other rules: The FDIC this week also withdrew three outstanding proposals on brokered deposits, corporate governance and the Change in Bank Control Act. In comments on the brokered deposits proposal, BPI emphasized the unintended consequences and disruptions that such a policy would create. The CBCA proposal would have exceeded the agency’s statutory authority and generated needless complexity, BPI said in comments on that measure. The corporate governance proposal would have imposed overly prescriptive requirements for bank boards.

In Case You Missed It

Senate Panel Considers Faulkender Nomination as Treasury No. 2

The Senate Finance Committee on Thursday held a hearing to consider the nomination of Michael Faulkender to be Deputy Secretary of the Treasury. Senate Finance Committee Chair Mike Crapo (R-ID) expressed support for Faulkender’s nomination, saying he was “highly qualified to serve as Deputy Treasury Secretary in this Administration.” Faulkender, a finance professor at the University of Maryland, previously served as a senior Treasury official, overseeing the implementation of the Paycheck Protection Program. He received questions on tax policy, fiscal policy and other key topics during the hearing. On the Corporate Transparency Act, Faulkender said: “The largest businesses out there can afford all the compliance activities and burdens that are imposed upon them. It’s the smaller businesses that — that have a smaller customer base to spread those costs over that are harmed. And so that’s why Treasury is going to reevaluate the rule that was implemented. The rules implementing CTA, we’re going to reevaluate those to make sure that the right tailoring takes place.”

Financial Stability Board’s Moloney Urges Significant Expansion of Regulatory Authority to Include Non-Banks

A top Financial Stability Board official cautioned against the risks that emerging technologies, such as crypto and artificial intelligence, may pose to the global financial system. Deputy Secretary General Martin Moloney, in remarks on March 4 at a Tokyo conference, warned of perils such as “herding” behavior, exacerbated volatility and operational risks and urged global regulators to bring AI, crypto and other technologies into the “regulatory perimeter.”

• Key quote: “Regulators need to act quickly to bring these actors inside the regulatory perimeter, as seen with crypto-assets,” Moloney said. “We often get the argument that regulation needs to adapt to innovation and not the other way around. This argument goes that we must lift the regulatory burden off innovators not familiar with financial regulation so that they can innovate. I don’t want to disparage this argument entirely, but it is incumbent on those who make this argument to also chart out the path for innovators to come into the regulated space.”
• Principles: Moloney referred to the FSB’s ongoing work on crypto assets and other technology topics and reiterated the organization’s guiding principles on innovation: “[I]f the underlying economic activities are the same, the risks are likely to be the same, and similar regulations should apply,” Moloney said. “The second principle is technology neutrality, allowing the market to decide on innovations. These principles, although valid, are challenging in practice.”
• Updated approaches: Regulation and supervision should match the technological sophistication of the entities they oversee, Moloney suggested. “Looking forward, the process of becoming a skilled regulator will still require a deep understanding of financial risks, but the regulator’s skillset must surely expand with the pace of financial innovation,” he said. Regulators should also address legal uncertainty around crypto and technological innovation and prepare for crises that move faster than in previous eras.
• Reading between the lines: The expansive, top-down approach espoused in these remarks – everything under a central regulatory umbrella — strikes a stark contrast with the U.S. presidential administration’s approach to crypto and innovation, which has embraced digital asset industry growth as a part of U.S. competitiveness and has called for regulatory clarity for entities like stablecoin issuers.
• Worth noting: The United States is represented on the FSB by the Treasury Department, Federal Reserve and SEC. It is not clear whether they support this effort.

Congress Aims to Invalidate CFPB Overdraft Rule

Members of Congress moved toward invalidating the CFPB’s overdraft rule in a Congressional Review Act resolution. The resolution advanced through the House Financial Services Committee this week, moving it one step closer to a final floor vote in that chamber. A matching legislative measure has been introduced in the Senate. In a further effort to chip away at Rohit Chopra’s CFPB record, the Senate voted this week to overturn a CFPB rule subjecting nonbanks with digital payment platforms to closer scrutiny.

UK’s PRA Considers Changes to Leverage Ratio

The UK Prudential Regulation Authority proposed changes to the retail deposits leverage ratio aimed at supporting economic growth and granting more breathing room to smaller banks before subjecting them to the ratio requirement. The PRA is consulting on changing this leverage ratio threshold to £70 billion, an increase of £20 billion.

• How it works: The leverage ratio aims to capture a simple percentage indicator of how much capital a bank has to fund its activities. Under current PRA requirements, a bank with over £50 billion in retail deposits or £10 billion of non-UK assets to meet a minimum leverage ratio requirement of 3.25% plus buffers. The thresholds took effect in 2016 and 2023 respectively.

• What’s new: The PRA is now proposing to increase the retail deposits threshold to £70 billion to reflect nominal GDP growth since 2016. “This increase would ensure that the threshold continued to capture major UK firms, whilst smaller firms below the new threshold would have more space to grow before becoming subject to the leverage ratio requirement,” the PRA said in a release. Sam Woods, CEO of the PRA, said in a statement: “Guarding against excessive leverage in our banking system is essential for economic stability, but we should achieve that in a proportionate way. Today’s proposals will support growth and innovation by giving smaller banks more space to grow before entering the leverage regime.”
• Timing: The consultation will close on June 5, 2025.

The Crypto Ledger

Here’s what’s new in crypto.

• Senate vote on DeFi rule: The Senate this week voted 70-27 to overturn an IRS rule that expanded the agency’s purview over decentralized finance. The rule required DeFi platforms to report detailed information on customers to the IRS starting for tax year 2027.
• Upcoming markup: The Senate plans to mark up a stablecoin bill next week, according to POLITICO. The legislation would lay out the contours of a regulatory framework for the digital assets.
• Enforcement bellwether: The case against Terraform Labs founder Do Kwon, a South Korean crypto executive recently extradited to the U.S., may prove to be a bellwether for the new administration’s crypto enforcement strategy, according to a recent Law360 analysis. “Regardless of whether the DOJ continues to pursue enforcement under both securities and commodities laws or abandons one theory of enforcement, or the court weighs in on the proper treatment of digital assets, the case should help clarify whether and under what circumstances cryptocurrencies will be treated as securities or commodities,” according to the piece.

Upcoming Events

• 3/9/2025—3/11/2025: Institute of International Bankers Annual Washington Conference

• 3/11/2025: House Financial Services Committee hearing on digital payments ecosystem, including stablecoins and CBDC

• 3/11/2025: Brookings Institution event on how New York is regulating financial services