On October 29, the Federal Reserve’s Division of Supervision and Regulation issued a Statement of Supervisory Operating Principles that formalizes Vice Chair for Supervision Miki Bowman’s August direction to reset how the Fed supervises banks. The goal of this action is to strengthen supervision by focusing on identifying and acting early on the most important risks to safety and soundness, using proportionate, timely measures. This represents a significant change from prior practice, moving away from process-heavy supervision and toward judgment-driven oversight.

A Firmer Focus on Material Risk

Examiners are instructed to prioritize issues that could materially affect a firm’s financial condition. Supervisory attention should not be consumed by processes, procedures, or documentation that do not threaten safety and soundness. To support this recalibration, the Fed will revive nonbinding “supervisory observations” (reversing SR 13-13’s prior directive to eliminate them) so exam teams can note lower-level issues without diluting focus on core risks. When risks fall outside existing tools, the memo encourages escalation up the management chain for timely review and action.

Relying on Primary Supervisors and Tailoring

The Gramm-Leach-Bliley Act’s mandate to “rely to the maximum extent possible” on primary state or federal supervisors is reinforced. The Fed should not conduct its own exams of depository subsidiaries unless reliance is truly impossible, such as when the primary supervisor does not share sufficient information. The principle of tailoring is sharpened: devote relatively more resources to large, complex, and systemically important firms, and relatively fewer to smaller, simpler institutions. For state member banks where the Fed is the primary federal supervisor, joint work with state agencies remains the norm, with alternate-year programs emphasizing reliance on state findings where feasible.

Remediation

The statement reframes how MRAs, MRIAs, and enforcement requirements are closed. If a firm’s internal audit is rated satisfactory, examiners should rely on its validation rather than performing duplicative testing. Examiners should not delay termination to “test” sustainability but instead end the matter once remediation is complete, then monitor over time and re-engage if issues recur. Examiners should avoid add-on “capstone” reviews unrelated to identified deficiencies or immaterial to safety and soundness as a condition of closure.

Rethinking Horizontal Reviews

For LISCC and LFBO portfolios, horizontal reviews are no longer routine. They may proceed only if the Deputy Director of Supervision determines the benefits to safety and soundness or to financial stability outweigh the costs. When performed, assessments should be measured against supervisory expectations, not the best practice of top peers, and results should be confidentially shared with banks, including comparative insights across institutions.

Liquidity Reality and Ratings Discipline

Examiners should not discourage firms from recognizing liquidity available from Federal Home Loan Banks (FHLB) in liquidity management or stress testing. Nor should they require prepositioning assets at the discount window as a precondition for future secured borrowing. Supervisory ratings must accurately reflect financial condition and material risks. Management and risk-management components of CAMELS or RFI/C(D) should not be overweighted. All components should be weighed based on their materiality to the institution.

MRAs/MRIAs

The standard for issuing MRAs and MRIAs is tightening to prioritize deficiencies that could materially impact safety and soundness, rather than procedural or documentation gaps. Communications must be specific and clear so that a person of ordinary intelligence can readily understand the deficiency and what “non-deficient” looks like. The statement also encourages robust dialogue. Examiners should promptly clarify expectations, invite feedback on whether a finding is justified, and collaborate on realistic remediation paths. The Fed is also revisiting its interpretation of the statutory standard for enforcement actions based on “unsafe or unsound” practices, with further clarification underway.

Our Take

The Fed’s operating principles mark a substantial pivot toward early, proportionate action on material risks, streamlined remediation, and more disciplined ratings and communications. Banks should respond by sharpening risk identification, empowering strong internal audit, and preparing to engage in specific, solution-focused dialogue. Supervision is currently becoming more pragmatic and risk-first.