Panel at Fed outreach urges supervisors to focus on material financial risks and clear rating rules
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Summary
Industry and trade representatives at a Federal Reserve Board EGPRA outreach event pressed for supervisory reforms that concentrate on material capital, liquidity and asset-quality risks, greater transparency in rating systems and relaxed rules that they say impose disproportionate burdens on some banks.
Julie Williams, acting deputy director for supervision at the Federal Reserve Board of Governors, opened the fourth EGPRA public outreach event and said policymakers will consider the panel’s comments as part of the review of federal banking rules.
Panelists representing industry groups and trade associations largely agreed that supervision should concentrate on material financial risks rather than process-driven or nonfinancial requirements. "Supervisory activities that focus on issues unrelated to material financial risk weaken and dilute supervision by diverting scarce supervisory and bank resources from material matters that directly bear on safety and soundness," said Sean Campbell, chief economist at the Financial Services Forum.
Speakers pointed to recent agency proposals and internal Fed changes as steps forward. Tabitha Edgins of the Policy Institute said reforms such as the Federal Reserve's LFI-rating revisions and other proposals on MRAs and supervisory operating principles can make supervision more effective and consistent. She warned, however, that when supervision centers on immaterial issues it can impose real costs: "as of the year end of 2024, 23 out of 36 LFIs were considered not well managed," she said, and cited a November 2024 GAO finding that many MRAs address nonfinancial risks.
Panelists proposed a set of concrete fixes. They urged finalizing rules that define "unsafe or unsound" practices and MRA standards, clarifying supervisory operating principles so supervisory observations are understood as nonbinding feedback, and requiring evidence to support findings that something poses a material threat to a firm. "Providing the evidence, providing the demonstrable analysis for why this particular practice could, under reasonably foreseeable circumstances, present a threat to the condition of the firm," Tabitha said, would make supervisory conversations more productive.
Several speakers cautioned about supervisory processes. Sean warned that horizontal reviews must compare "like to like" or they risk producing misleading supervisory signals. Amy Lettig of the Independent Community Bankers of America urged limiting duplicative information requests so community bank managers spend less time on repetitive compliance tasks and more on lending.
Speakers also raised concerns about confidential supervisory information (CSI). Tabitha argued that current CSI rules can be overbroad and chill legitimate information sharing, and proposed three reforms: adjust how criminal penalties for CSI violations are framed, authorize limited disclosures among banks and government agencies for legitimate uses (for example cyber and fraud information sharing), and adopt a uniform CSI framework across the three banking agencies.
The session concluded with panelists encouraging continued engagement as agencies consider rulemaking and supervisory updates. No formal agency actions or votes were taken at the event; it served as public comment and outreach in the EGPRA process.
