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Fed Moves to Soften Oversight Criteria for Big Banks

In a move that signals a shift in regulatory posture, the Federal Reserve on Thursday proposed changing the definition of what qualifies as a “well-managed” bank—a classification that significantly influences a financial institution’s ability to grow, merge, or expand operations.

The proposed rule, now open for public comment, would allow banks that receive one “deficient” rating across three supervisory categories—capital, liquidity, and governance/controls—to still be deemed well-managed overall.

This marks a departure from 2018-era rules, which require a clean record across all criteria for a bank to maintain this status. Under current regulations, even a single deficiency bars a bank from certain activities, including mergers and acquisitions.

A Pragmatic vs. Risky Approach?

Michelle Bowman, Vice Chair for Supervision at the Federal Reserve, defended the proposal as a “pragmatic” recalibration that better reflects a bank’s holistic condition.

“The proposal adopts a pragmatic approach... By addressing this mismatch between ratings and overall firm condition, we provide greater recognition of a firm’s full performance,” Bowman stated.

Bowman noted that this change could better align how the Fed assesses risk and management quality, particularly when a deficiency in one area may be offset by strong performance in others.

Pushback from Former Regulators

However, the move has not gone unchallenged. Michael Barr, Bowman’s predecessor and the Fed’s former Vice Chair for Supervision, issued a stern warning about the implications.

“This would fundamentally alter the long-standing definition of well-managed and could introduce greater systemic risk,” Barr argued.

Governor Adriana Kugler echoed similar concerns. While she acknowledged issues with the current assessment framework, Kugler said the Fed risks “going too far in the other direction” and weakening key safeguards that protect financial stability.

Context: Recent Regulatory Tensions

This proposal comes on the heels of another controversial Fed decision just weeks ago, when it approved stricter capital requirements for large banks—a move that Barr and Kugler also opposed. Their dissent reflects growing internal disagreement within the Fed on how tightly to regulate the financial sector.

The broader context includes rising pressure from Wall Street and banking lobbyists, who argue that overregulation stifles innovation and hinders competitiveness, especially as the U.S. financial system navigates economic uncertainty and growing competition from fintech.

On the other hand, critics warn that loosening rules in the wake of recent bank failures, including Silicon Valley Bank and Signature Bank, could repeat past mistakes and lead to systemic vulnerabilities.

What’s Next?

The proposed changes are open for public comment and are likely to face significant scrutiny from lawmakers, watchdog groups, and economists. If approved, the rule could reshape the playing field for how banks qualify for regulatory benefits, impacting everything from mergers and capital raising to executive compensation and lending capacity.

Whether this represents sensible modernization or a rollback of critical safeguards remains at the heart of the debate.