US State Supervisors Optimistic about Supervisory Reforms

State supervisors in the US are welcoming the Federal Reserve Board’s proposed bank examination reforms as a much-needed move toward a more tailored, risk-focused regime, though not everyone is convinced the transition will be seamless, as reported by the American Banker. 

The shift stems from an October memo circulated within the Federal Reserve’s supervisory arm. It outlined a more streamlined examination strategy that leans more heavily on state examinations, pulls Fed examiners back from proactively overseeing bank subsidiaries, and directs teams to concentrate on “material financial risk.” Michelle Bowman, Vice Chair for Supervision at the Federal Reserve Board, explained in November that the approach is not about “narrowing” supervisors’ focus, but “sharpening” it. She added that it is meant to “build a more effective supervisory framework that truly promotes safety and soundness.”

For state regulators, the appeal is practical. Tony Salazar, Maryland’s Commissioner of Financial Regulation, pointed to the time lag that can result from duplicative back-and-forth between state and federal agencies. He said the goal is to “move quicker,” with “more targeted and useful information” for bankers. “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,” said Brandon Milhorn, President and CEO of the Conference of State Bank Supervisors. He also urged supervisors to “look beyond asset size” and build frameworks that reflect business models and risk profiles, particularly for community banks.

But the American Banker identifies an underlying tension: while this may improve focus and speed, it may also introduce new opportunities for inconsistency. Mayra Rodriguez Valladares, Managing Principal at MRV Associates, warned that the approach could be “dangerous” if variation across state exams leads to issues being missed, and argued that states may not have the same resources as federal agencies.