The Federal Reserve has recently implemented significant changes to its supervisory framework, resulting in a marked improvement in the ratings of large banks. According to the Fed’s latest Supervision and Regulation Report, approximately 80% of large financial institutions with assets exceeding $100 billion are now considered well-managed. This marks a substantial increase from around 60% in 2025 and less than 40% in 2024.
This improvement follows a policy shift that adjusted the criteria for a well-managed rating. Previously, any deficiency in capital, liquidity, or governance automatically disqualified a bank from receiving this rating. The new framework allows banks to still be classified as well-managed if they have a minor deficiency in one area. This change aims to better reflect the overall financial health of institutions rather than penalizing them based on isolated issues.
The revised supervisory approach also addresses concerns raised by Federal Reserve Vice Chair for Supervision Michelle Bowman, who highlighted the disparity between banks’ financial conditions and their supervisory ratings. Bowman emphasized that subjective assessments of governance had sometimes overshadowed measurable financial risks, prompting a recalibration of evaluation standards to focus more on material safety and soundness risks.
Alongside rating adjustments, the Fed has reduced the number of enforcement actions such as Matters Requiring Attention (MRAs) and Matters Requiring Immediate Attention (MRIAs). These changes align with the Fed’s updated Statement of Supervisory Operating Principles, which directs examiners to prioritize direct threats to safety and soundness over procedural or documentation shortcomings.
Despite these improvements, the report notes emerging risks, particularly concerning the rapid expansion of lending to nonbank financial institutions (NBFIs). Although delinquency rates remain low in this sector, some high-profile defaults have raised concerns about private credit exposures. As a result, banks are revisiting their collateral management practices for these loans.
In parallel with these supervisory developments, major banking industry groups—the Bank Policy Institute and the American Bankers Association—have urged the Federal Reserve to update its tailoring rule thresholds. This rule sets regulatory standards based on bank size and risk profiles. Industry representatives argue that thresholds established in 2019 have not kept pace with economic growth and inflation over the past seven years, potentially misaligning regulatory requirements with current realities.
The associations recommend recalibrating these thresholds to better reflect economic conditions and adopting automatic indexing mechanisms to ensure future adjustments remain timely. They also suggest that broader reforms could enhance the tailoring framework’s effectiveness by revisiting category definitions and risk sensitivity.
Overall, these coordinated efforts by the Federal Reserve and banking stakeholders aim to strengthen supervisory practices while promoting a more balanced regulatory environment. The adjustments seek to support financial stability and economic growth by ensuring that oversight is both rigorous and appropriately tailored to evolving market conditions.
