- Key Insight: State bank regulators and examiners say the federal supervision regime has long been in need of streamlining, and supervisory changes announced by the Federal Reserve are seen as a step in the right direction.
- Expert Quote: "To me it doesn't sound like a retreat of the Federal Reserve so much as they are going to work with their supervisory partners to make sure they are efficiently allocating resources and covering the topics that are most concerning," — Brandon Milhorn, CEO of the Conference of State Bank Supervisors.
- Forward Look: Over the past decade, federal supervisory priorities have shifted dramatically from one administration to the next, often to the chagrin of state supervisors.
State regulators and examiners have expressed optimism about a proposed reshuffling of bank supervision roles, though some observers are concerned that the shift could precipitate heightened risk in the banking system.
In October, the Fed's supervisory arm released a memo to employees outlining a revised strategy for conducting examinations of banks and their subsidiaries, placing greater reliance on state examinations.
The
Fed Vice Chair for Supervision Michelle Bowman said in a November statement that the new supervisory approach "is not about narrowing our focus — it is about sharpening it."
"This is not about what we are leaving behind — it is about building a more effective supervisory framework that truly promotes safety and soundness across our financial system, which is the Federal Reserve's core supervisory responsibility," Bowman said.
Brandon Milhorn, CEO of the Conference of State Bank Supervisors, said that states have been saying for "decades" that federal regulation needs to be appropriately tailored. Milhorn thinks this is a step in the right direction.
"To me it doesn't sound like a retreat of the Federal Reserve so much as they are going to work with their supervisory partners to make sure they are efficiently allocating resources and covering the topics that are most concerning, those core financial risks that Vice Chair for Supervision Bowman often references," he said.
Why state regulators see opportunity
State supervisors say they have long been on the front lines of overseeing banks and their subsidiaries operating within their jurisdictions.
The announced changes have generally been met with a positive outlook, with some supervisors expressing hope that adjustments to examination practices will lead to a more streamlined and timely process.
Tony Salazar, Maryland commissioner of financial regulation, pointed out that yearly bank examinations sometimes faced time lags because of the back-and-forth between state examiners and federal examiners. A revised approach by the Fed could address that pain point.
"The thinking, I believe, from the Fed — and I know from the states — is that we want to move quicker," Salazar said. "States are more nimble and always have been. To the extent these changes help the Fed move faster and provide more targeted and useful information to bankers, that's going to be great."
A West Coast-based state examiner who was not authorized to speak to the media said the changes could also reduce friction between state and federal regulators.
"It honestly makes our job easier at the state level," they said. "There are times when we work with one of the regulators and we would be butting heads and wouldn't necessarily see eye-to-eye. Now with the federal agencies taking a more passive approach, it might make our job easier."
Beyond changes to how the Fed will participate in bank examinations, Milhorn expressed support for Bowman's push to make changes to how
"We need to look beyond asset size and think about business models and risk profiles and construct supervisory frameworks that reflect those risks, particularly for community banks," said Milhorn. "The cost of supervision and compliance for community banks is disproportionate to other banks."
Outstanding concerns
It is too early to assess how the changes outlined in the Federal Reserve's October memo will affect bank supervision in the years ahead.
Milhorn said that feedback from CSBS' members, which includes state banking and financial regulators throughout the country, is "a lot of wait-and-see."
"There's a lot of curiosity about how this is going to play out on an exam-by-exam basis," he added.
Salazar said questions remain about how federal examination guidance will be implemented and whether it could create challenges for state regulators.
"Risk is a problem," said Salazar. "What's going to fall through the cracks? We are working to mitigate that by having conversations with [federal officials] regularly."
Salazar added that there can be concern about federal supervisors "now look[ing] at something with less scrutiny," meaning that if there is a significant material risk that the states miss, it's less likely that federal supervisors would pick up on it.
"There'll be a time lag," he said. "Again, is that important and how important is that if we're picking it up? It's something that we believe ought to be addressed."
Mayra Rodriguez Valladares, managing principal MRV Associates, said the new supervisory approach was potentially "dangerous," noting that issues may be accidentally overlooked during state examinations.
"One state may be looking at a certain part of the bank one way, and another state may be looking at another part of the bank another way, so that's how things get missed," she said. "Who's really looking at the whole thing and making sure that the supervision and the exams are uniform?"
Valladares said bank supervision by state regulators can vary in rigor, in part because of resource constraints at the local level and because each state may conduct examinations slightly differently.
"I think this puts a burden on the states, because if the Fed will now be relying on the last report from the states, the states will be on the front lines — and heaven forbid something goes wrong with the bank," she said. "The state regulators are now the ones that are going to be blamed, and the state regulators do not have the resources that the Fed, [Federal Deposit Insurance Corp.], [Office of the Comptroller of the Currency] have."
A political whipsaw
State regulators have emphasized the importance of a supervisory framework that is resilient and durable across political cycles.
In recent years, banking oversight has become closely tied to
"What our members want is a right-sized and tailored environment that is durable, protects safety and soundness, ensures consumers are protected, and can stand the test of time," Milhorn said.
Salazar echoed that view, adding that "if the pendulum swings, we'll continue to work with our federal counterparts, as we always have."
Meanwhile, Valladares said tying supervision to politics "causes a lot of uncertainty," which is harmful to the regulatory landscape.
"Imagine if you're a bank regulator and depending on the administration, you probably don't even know what you're supposed to be doing and what's changing because it all depends on what the administration is going to announce," she said. "It causes a lot of uncertainty."
