On November 18, the Fed released a statement of supervisory operating principles, which outlined the Division of Supervision and Regulation’s new approach intended to shift the focus of examiners toward identifying and addressing material financial risks to bank safety and soundness. The principles directed supervisory staff to prioritize risks that could materially impact a firm’s financial condition, instead of procedural or documentation shortcomings. The statement instructed staff not to assume current or past practices, but to align work and conclusions with the new principles and directional shift.

Additional supervisory operating principles included:

1. Reducing duplication with other supervisors and tailoring supervision based on institutional risk, size, and complexity;
2. Relying on satisfactory internal audit functions for validation of remediation and monitoring sustainability after enforcement actions are terminated.
3. Limiting horizontal reviews unless benefits outweigh costs;
4. Allowing nonbinding supervisory observations for shortcomings that do not rise to the level of material risk;
5. Ensuring supervisory ratings reflect an institution’s actual financial condition and material risks, with all component ratings weighed appropriately;
6. Instructing examiners to avoid vague or overbroad language in MRAs and MRIAs, encouraging meaningful dialogue with institutions, and responding promptly to questions about supervisory findings; and
7. Clarifying examiner expectations for liquidity management, including not requiring prepositioning of assets at the discount window or prohibiting the use of FHLB liquidity.

In the Fed’s announcement, the Fed stated it would be training examiners on these principles and expects to formalize them further in public supervisory guidance or regulatory changes, where appropriate.

In a speech the same day, Fed Governor Michael Barr emphasized the importance of strong, forward-looking supervision and warned against efforts to weaken oversight. Barr cautioned that narrowing examiner focus to only material financial risks, reducing the weight of management in ratings, or limiting examiner authority to issue enforcement actions could undermine the ability to address emerging risks proactively. Barr also raised concerns about proposals to allow banks’ internal audit functions to determine remediation of supervisory findings and about reductions in supervisory staffing. Barr stressed that weakening any element of the supervisory framework could have damaging consequences for the banking system and the broader economy.