Major Wall Street banks are privately lobbying the Federal Reserve to design a new banking supervision framework that would be difficult for future administrations to overturn, according to sources. The banks are specifically urging the Fed to formally clarify the legal status of a more lenient supervisory process intended to replace "Matters Requiring Attention" (MRA), thereby providing a more solid legal foundation for the long term. Sources indicate the Fed plans to offer clearer guidance on this matter.
The current Fed Vice Chair for Supervision, Michelle Bowman, is leading a major overhaul of the Fed's bank supervision rules. She argues that the current regulatory process imposes excessive burdens on banks, undermining their ability to lend to businesses and individuals. Critics, however, contend that the strict post-2008 financial crisis regulations have led banks to abandon certain types of financing activities, creating space for non-bank financial institutions that are not subject to the same level of oversight to fill the gap.
Under the newly proposed regulatory framework, the Fed would significantly reduce its use of MRAs. For a long time, MRAs have been a primary tool for bank examiners to compel lenders to address deficiencies in risk management and internal controls. Bowman stated that many MRAs actually focus on minor errors and do not directly relate to operational risks.
In October last year, the Fed announced that it would only use MRAs for issues involving significant financial risks going forward. For other matters, it would employ informal "observations" as reminders. This "observations" mechanism is essentially a return to a practice the regulator used before 2013. However, under the new supervisory framework, the use of "observations" carries legal ambiguity, as it is not clearly specified how regulators would respond if a bank fails to take action on them.
The report notes that banks are concerned that a future Fed leadership under Democratic control might exploit this ambiguity to escalate "observations" into MRAs if issues remain unaddressed.
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