2025 Wrap-Up Of Supervisory Changes At Federal Banking Agencies

Over this past year, the Federal Reserve, OCC, and FDIC have announced a slate of proposals and actions to reform supervision, reduce compliance costs, and refocus attention on matters that may have a material financial impact on regulated institutions or impose costs on the Deposit Insurance Fund (DIF). It is a remarkable reorientation following years of increased supervisory scrutiny over any and all perceived risks.

These proposals are a result of the deregulatory agenda of the Trump Administration, which repeatedly criticized mission creep at the federal agencies and how agency resources are spent. For example, Treasury Secretary Scott Bessent wrote in September that mission creep at the Federal Reserve threatens its monetary independence. The unifying feature for these proposals is a goal to tailor supervisory activities to the agencies' mission and the banks' relative size and activities, while still ensuring the safety and soundness of the U.S. banking system. The proposals aim to prioritize real financial risks over process, documentation, and other non-financial risks.

Key Takeaways

• Less enforcement; more growth. The agencies' actions are likely to lead to a reduction in enforcement activity, providing more space for institutions to engage in new or expanded activities and acquisitions, including through streamlined filing obligations. More institutions are expected to be considered "well managed" under the revised Large Financial Institutions (LFI) Framework and fewer institutions will have a less-than-satisfactory composite rating due to a higher matter requiring attention (MRA) standard in the proposed supervisory standards rulemaking.
• Elimination of reputation risk. The joint OCC and FDIC proposed rulemaking on reputation risk would codify recent guidance changes and "respond to concerns expressed in Executive Order 14331, Guaranteeing Fair Banking for All Americans." While the proposed rule does not require specific action by banks, given EO 14331 and expected (and ongoing) examinations of banks by federal regulators for instances of unlawful debanking, banks should consider reviewing how they use reputation risk as a factor in decision-making, taking into account the agencies' view that traditional risk channels related to safety and soundness and compliance with applicable laws could be misused as a pretext for reputation risk.
• Restoring confidence in examiner findings. The joint OCC and FDIC proposed rulemaking on supervisory standards sets forth a higher bar for the issuance of MRAs, which remain lower than the proposed "unsafe or unsound practice" definition for enforcement actions. In the past, bank examinations have operated more as a "check-the-box" exercise. The proposed standard gives examiners flexibility to use their own judgment to determine whether an issue merits a MRA before it rises to an enforcement concern, while prohibiting examiners from imposing their managerial judgment on an institution.
• Future administration proofing. The joint proposed rulemakings would codify changes to agency enforcement and supervisory practices in regulation, rather than mere guidance. This move would make it more challenging (e.g., under administrative law) for future administrations to change course. However, the lack of a precise definition of "material harm" in the proposed "unsafe or unsound practice" definition and MRA standard leaves some room for interpretation that could conceivably be adjusted by new agency leadership. Further clarity would be a perfect subject for future guidance or rulemakings from the agencies.
• Supervisory appeals amid staff cuts. Cuts to supervisory staff at the agencies through reductions-in-force, retirements, and voluntary separation have reduced the number of experienced bank examiners and supervisors at each of the agencies. Combined with the proposed changes to the agencies' supervisory programs, there will be a steep learning curve for examiners. Notwithstanding, given that the FDIC has signaled that reforms to supervisory appeals are also on the table, institutions should not be afraid to appeal—formally or informally—examination findings or practices that do not comport with the new supervisory approaches and policies.

OCC Push to Reform Community Bank Supervision

On October 6, the OCC announced a package of community bank-focused deregulatory actions and proposals, including changes to the examination procedures for community banks. In Bulletin 2025-24, the OCC reported that beginning January 1, 2026, it will eliminate mandatory OCC policy-based examination requirements for community banks. Under the Federal Deposit Insurance Act (FDI Act), the OCC is required to conduct a full-scope, on-site examination of every bank every 12 to 18 months. Historically, OCC policy had set examination activities at a predefined frequency and scope. The bulletin provides that the OCC soon will move away from fixed, policy-based examination requirements for community banks, and instead allow examiners to tailor their on-site examination of a community bank's specific activities in light of its size, complexity and risk profile, with heightened focus on material financial risks. The bulletin indicated that this may include streamlined testing methods, more limited sampling, and reliance on bank-provided reports as appropriate for a community bank's activities and size, complexity, and risk profile.

In Bulletin 2025-25, the OCC separately announced that it will no longer examine community banks using the comprehensive procedures and standards in its Retail Nondeposit Investment Products (RNDIP) booklet, and instead align RNDIP examinations for community banks with the core assessment standards in the Community Bank Supervision booklet. RNDIPs are investment products that are typically not insured by the FDIC, such as mutual funds, exchange traded funds, variable and fixed rate annuities, equities, and fixed income securities. The OCC explained that the rigorous examination procedures and risk management practices outlined in the RNDIP booklet are unsuited for community banks, which tend to have more limited RNDIP offerings, and not a prudent use of OCC resources.

At the same time, the OCC released a notice of proposed rulemaking to formally expand the definition of community banks to include institutions with less than $30 billion in total assets, an increase from $10 billion. The proposed rule would cover a national bank and federal savings association that:

1. has less than $30 billion in total assets and is not an affiliate of a depository institution or foreign bank with $30 billion or more in total assets;
2. is well capitalized; and
3. is not subject to a cease and desist order, a consent order, or a formal written agreement, that requires action to improve the financial condition of the national bank or federal savings association unless otherwise informed in writing by the OCC.

Thus, not only is the OCC eliminating mandatory policy-based examination requirements for community banks and reworking the core assessment standards, it is also proposing to bring more banks under the community bank umbrella. Future interagency refinements to the community bank leverage ratio may provide further relief. And, newly chartered de novo banks will be able to take advantage of many of these developments.

Comments on the proposed rulemaking are due 60 days after publication in the Federal Register.

Proposed Elimination of Reputation Risk From OCC and FDIC Supervisory Programs

Although the OCC and FDIC (and Federal Reserve) have already moved to remove references to reputation risk from their guidance, policy documents, and examination manuals, on October 7, the OCC and FDIC issued a notice of proposed rulemaking that would formally eliminate reputation risk from the OCC and FDIC's supervisory programs in their regulations. Under the proposal, "reputation risk" would be defined as "any risk, regardless of how the risk is labeled by the institution or regulators, that an action or activity, or combination of actions or activities, or lack of actions or activities, of an institution could negatively impact public perception of the institution for reasons not clearly and directly related to the financial condition of the institution."

The proposed rule would bar examiners from criticizing or taking adverse action against a bank on the basis of reputation risk. The proposal would also prohibit the agencies from requiring, instructing, or encouraging an institution to modify or terminate business with a person or entity "on the basis of a person or entity's political, social, cultural, or religious views or beliefs, constitutionally protected speech, or solely on the basis of politically disfavored but lawful business activities perceived to present reputation risk."

The proposed rule would not affect the ability of the OCC and FDIC to take supervisory actions to address traditional risk channels related to safety and soundness and compliance with applicable laws; however, agencies could not use actions addressing these other risks as a pretext for evaluating a bank based on its reputation risk.

Comments on the joint proposed rulemaking are due by December 29, 2025.

Proposed Definition of "Unsafe or Unsound Practices" and Constraints on Issuing MRAs

In another notice of proposed rulemaking, the OCC and FDIC proposed to amend the agencies' enforcement and supervisory standards. The proposed rulemaking would define for the first time the term "unsafe or unsound practice" for purposes of section 8 of the FDI Act and establish new standards for when and how examiners may issue MRAs, focusing these concepts on potential material financial impact on institutions and costs on the DIF.

The agencies clarified that the definition aims to capture practices sufficiently proximate to a material harm to an institution's financial condition, such as those that are likely to affect an institution's capital, asset quality, earnings, liquidity, or sensitivity to market risk, and practices that materially increase the probability that an institution would fail and impose a material risk of loss to the DIF. The agencies also indicated that, under the proposed definition of unsafe or unsound practice, "it would be rare for an institution to exhibit unsafe or unsound practices ... based solely on the institution's policies, procedures, documentation or internal controls, without significant weakness in the institution's financial condition." For concerns that do not rise to the MRA standard, the proposed rule contemplates that examiners may issue non-binding suggestions that an examiner may not require an institution to adopt or present to its board of directors.

Lastly, the proposal would require agencies to "tailor" their supervisory and enforcement actions under section 8 of the FDI Act and the issuance of MRAs based on the capital structure, riskiness, complexity, activities, asset size, and any financial risk-related factor that the agencies deem appropriate. For example, the preamble noted that the agencies would not expect that for purposes of determining "material harm" that a particular projected percentage decrease in capital or liquidity that rises to the level of materiality for the largest institutions would necessarily also be material for community banks.

Comments on the joint proposed rulemaking are due by December 29, 2025.

Federal Reserve Plans to Rename and Shrink Division of Supervision & Regulation

In line with similar organizational changes previously announced by the OCC and FDIC, it was reported that the Federal Reserve aims to re-shape its supervision and regulation division to "focus on banks' material risks rather than become distracted by process-related errors that do not impact a firm's safety and soundness." In a meeting with staff on October 30, Federal Reserve Vice Chair for Supervision Michelle Bowman revealed that the division's operations unit would be renamed the "business enablement group" and would include a new position focused on industry engagement. The Federal Reserve would also aim to shrink the division by 30%, from about 500 employees to roughly 350, by the end of 2026 through natural attrition, retirements, and voluntary separation incentives. These cuts, however, are predicted to only affect staff at the Federal Reserve Board, not the 12 regional Federal Reserve Banks, where most of the Federal Reserve's supervisors work, which may dampen the overall impact. Vice Chair Bowman indicated that the division is expected to "operate with a flatter organizational structure and fewer management layers." Lastly, Vice Chair Bowman provided that she will require the division to rely on the examinations of a bank's primary federal regulator rather than duplicate efforts.

Large Financial Institution Framework Final Rule

On November 5, the Federal Reserve released a final rule amending the supervisory rating system for large financial institutions (LFI Framework). The LFI Framework generally applies to bank holding companies with total consolidated assets of $100 billion or more, and U.S. intermediate holding companies of foreign banking organizations with total consolidated assets of $50 billion or more.

The final rule essentially adopts the proposed rule, which we analyzed in a previous advisory. Under the revised LFI Framework, an institution will obtain or retain its "well managed" status if it receives at least two Broadly Meets Expectations or Conditionally Meets Expectations component ratings and no more than one Deficient-1 component rating. An institution would still be considered not "well managed" if it receives a rating of Deficient-1 for two or more component ratings or a rating of Deficient-2 for any of the component ratings.

The final rule also eliminates the presumption in the LFI Framework that the Federal Reserve will impose an enforcement action on institutions with one or more Deficient-1 ratings. Instead, institutions with one or more Deficient-1 ratings may be subject to an informal or formal enforcement action, depending on particular facts and circumstances. However, the final rule will continue the presumption that the Federal Reserve will initiate a formal enforcement action against an institution with a Deficient-2 rating for any of its component ratings.

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