The U.S. Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) are jointly executing one of the most significant overhauls of bank supervision philosophy in over a decade — moving away from process-heavy, documentation-driven examination regimes toward a leaner, risk-focused supervisory framework that concentrates examiner resources on material financial threats to bank safety and soundness. The shift, unfolding across 2025–2026 under new leadership at both agencies, has major implications for how U.S. banks of all sizes are examined, rated, and held accountable by their regulators.
What Has Changed: The New Supervisory Operating Principles
The Federal Reserve Board released information regarding enhancements to bank supervision in November 2025, providing new supervisory operating principles to all Federal Reserve supervisory leadership and staff, intended to focus Federal Reserve examiners on material financial risks threatening the safety and soundness of banks and on taking timely, proportionate action to ensure those risks are properly addressed. "Our supervisory approach is not about narrowing our focus — it is about sharpening it," said Vice Chair for Supervision Michelle W. Bowman. "By anchoring our work in material financial risks, we strengthen the banking system's foundation while upholding transparency, accountability, and fairness."
In line with these changes, 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." The Federal Reserve also aims 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.
The FDIC's Broad Supervisory Reset
The FDIC is executing a broad supervisory reset that addresses exams, capital, liquidity, and Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) oversight, with the goal of reducing process-driven burden while preserving strong standards for safety, consumer protection, and financial stability. In public statements made in March 2026, FDIC Chairman Travis Hill emphasized the need to focus examinations on what actually affects safety and soundness.
In 2025, the FDIC implemented changes to improve the efficiency of the examination process and the timeliness of supervisory feedback by simplifying internal procedures and reducing unnecessary documentation, particularly for well-rated community banks. The FDIC is also risk-focusing examination procedures, shortening reports, and reducing documentation for specialty reviews such as AML and information technology examinations — changes that will improve the efficiency of the examination process without impacting the safety and soundness of supervised banks.
Redefining 'Unsafe and Unsound': The Interagency Rulemaking
In October 2025, the FDIC and the Office of the Comptroller of the Currency (OCC) issued a joint proposed rule that would define an "unsafe or unsound practice" for purposes of Section 8 of the Federal Deposit Insurance Act, and would establish uniform standards for matters requiring attention and non-binding supervisory observations as part of the examination process. By defining these key terms in a rule, the FDIC intends to ensure supervisory criticisms are focused on the issues most relevant to a bank's safety and soundness.
Reputational risk became an early casualty of these changes. Following a presidential executive order targeting "politicized or unlawful debanking," the FDIC and OCC proposed joint rules to eliminate reputational risk as a standalone basis for supervisory criticism. The FDIC also proposed creating an independent Office of Supervisory Appeals. The Federal Reserve made parallel moves, but stopped short of joining the OCC/FDIC proposals.
Model Risk Management: A Principles-Based Overhaul
On April 17, 2026, the OCC, Federal Reserve, and FDIC issued revised supervisory guidance on model risk management, superseding the agencies' previous guidance that had been issued in 2011. The revised guidance represents a shift toward a more flexible, principles-based approach to model risk management, reflecting supervisory experience and industry feedback accumulated over the past fifteen years, as well as significant advancements in modeling practices.
Regulators are also drawing clearer boundaries around digital assets. Payment stablecoins will not be eligible for FDIC pass-through deposit insurance, and technology alone does not change the legal definition of a deposit. Tokenized deposits that meet the statutory definitions are being treated accordingly, signaling that innovation is welcome, but legal substance matters more than technical form. This federal oversight reset is best understood as a refocusing, not deregulation — supervisory expectations remain rigorous, but the lens through which regulators assess safety and soundness has fundamentally changed.
What It Means for Banks — Especially Community Institutions
For many community and mid-size institutions, this has practical implications: reduced exam frequency and more tailored exam scopes for smaller institutions, with examiner time increasingly directed at the financially material factors that genuinely threaten institutional safety rather than technical or documentation-driven deficiencies, affecting exam scope, cadence, and dialogue throughout the supervisory lifecycle.
For the most authoritative and up-to-date primary source on the Federal Reserve's supervisory reform agenda, the Federal Reserve's Supervision and Regulation page provides access to all supervisory letters, policy statements, examination frameworks, and press releases directly from the Board of Governors — the definitive resource for bank compliance officers, legal counsel, and investors navigating the new supervisory landscape.
The Bigger Picture: A Decisive Directional Shift
U.S. banking regulation underwent a material reset in 2025 and into 2026. With new leadership at the Federal Reserve, the OCC, and the FDIC, the second Trump Administration moved quickly to redirect regulatory policy toward an embrace of digital assets, a reimagination of the regulatory perimeter, capital reform, and a recalibrated supervisory approach focused on financial risk. The result was not incremental change, but a decisive shift in the tone and trajectory of federal policy. Whether this recalibration makes the US banking system more efficient without compromising its resilience — particularly in an environment of elevated interest rates, geopolitical uncertainty, and rapid AI-driven transformation — will be the defining question for bank supervisors, boards, and investors over the next two to three years.