Washington, United States. Wall Street banks are pressing the Federal Reserve to cement its new supervisory regime behind the scenes so the changes would be harder to reverse under future Democratic administrations, according to four people with knowledge of the matter. The effort comes as Trump administration regulators carry out the biggest overhaul of bank oversight since the 2008 financial crisis.
Supervisory overhaul
The changes are sharply reducing the use of matters requiring attention, or MRAs, the main tool bank examiners have long used to push lenders to fix weaknesses in risk management and controls. Banks, seeing a rare chance to ease what they describe as a hostile and onerous regime, are seeking to lock in the shift.
Seeking legal clarity
The lenders are urging the central bank to formally address legal uncertainty around the softer process that has replaced MRAs, the people said. They want banks to have a stronger long-term legal footing, and the Fed plans to provide more clarity, according to the sources granted anonymity to discuss private talks.
Political concerns
The effort, reported here for the first time, shows banks are already trying to future-proof the changes in anticipation that Democrats skeptical of Wall Street may seek to reverse them. That has fueled concerns among some Fed watchers about the growing politicization of supervisory and regulatory policy.
Bowman leading the changes
Michelle Bowman, the Fed vice chair for supervision under Trump, is leading the overhaul. Todd Baker, senior fellow at the Richman Center for Business, Law and Public Policy at Columbia University, said Bowman is “attempting to alter the supervisory culture of the Fed and to shift the power balance … in favor of bank management.”
Bowman has said supervisors are too focused on catching small missteps and that her aim is to direct attention to real risks rather than weaken oversight. A Fed spokesperson declined to comment.
How MRAs and observations work
An MRA is a confidential notice used by examiners to identify problems at banks and direct firms to correct them. If a firm fails to fix the issue, it can eventually lead to a formal enforcement action and monetary penalties. Large banks typically face multiple MRAs at any given time.
In October, the Fed said it would reserve MRAs for material financial risks and return to using observations, a tool it dropped in 2013, to flag issues informally. In a February memo, the central bank said it may also downgrade some existing MRAs to observations.
Banks want written assurances
Unlike MRAs, observations are nonbinding. Banks have welcomed the new approach but believe observations are legally ambiguous, and they say it is unclear how supervisors would respond if the issues are not addressed, the sources said.
They fear future Democratic Fed leaders could use that ambiguity to escalate unresolved observations into MRAs. Banks are therefore seeking explicit written assurances that supervisors will not do that, and that observations will only be escalated if the underlying facts change, the people said.
The Fed has said it will update public 2013 documentation on observations, which one of the people said could provide more clarity.
