Our Take: financial services regulatory update

Change remains a constant in financial services regulation

Read "our take" on the latest developments and what they mean.

Fed proposes changes to ratings frameworks

What happened? On July 10^th, the Fed proposed changes to the Large Financial Institution (LFI) Rating Framework and the Insurance Supervisory Framework, which the Fed uses to evaluate the operations of large holding companies subject to its jurisdiction.
What would the proposal do?
- Redefine “well managed” definition: Currently, an LFI is not considered “well managed” if it receives a Deficient-1 rating for any of the three supervisory components - (1) capital planning and positions, (2) liquidity risk management and positions, and (3) governance and controls. The proposal would change this so that a firm would be considered “well managed” if it receives:
  - At least two component ratings of Broadly Meets or Conditionally Meets Expectations;
  - No more than one component rated Deficient-1; and
  - No component rated Deficient-2.
- Remove enforcement presumption for Deficient-1 ratings: The proposal eliminates the default assumption that a firm rated Deficient-1 in any component will be subject to an informal or formal enforcement action. Supervisory action would instead be determined case by case.
- Allow for reconsideration of past ratings: The proposal clarifies that a firm may receive a Conditionally Meets Expectations even if it was previously rated Deficient-1 – including firms currently subject to an enforcement action – if remediation and mitigation efforts are sufficiently advanced. In these cases, examiners may determine that a firm’s prospects for remaining safe and sound are no longer at significant risk, despite unresolved supervisory issues.
- Align insurance supervisory treatment: The Insurance Supervisory Framework, which is modeled on the LFI Framework, would be revised in parallel, applying the same threshold for “well managed” status to insurance holding companies.
Which firms would be affected? According to the Fed’s economic analysis, 36 bank holding companies (BHCs) were subject to the LFI Rating Framework as of Q4 2024 and 23 of those were not “well managed” under the current LFI rating system. The Fed estimates that eight of the 23 BHCs would newly qualify for “well managed” status under the proposed LFI rating changes. However, as most large BHCs have registered as Financial Holding Companies (FHCs), their bank subsidiaries must also be “well managed” for the FHC as a whole to be deemed “well managed.” As a result, of the eight BHCs which could benefit from a ratings change, the Fed indicates that only three would become “well managed” under the FHC definition. The proposal further states that the five insurance companies currently subject to the Insurance Supervisory Framework would not have a change in status.
What’s next? The proposal will be open for comment for 60 days after it is published in the Federal Register.

Our Take

Promise made, promise kept. Just over a month after announcing plans to revisit supervisory ratings, new Fed Vice Chair for Supervision Michelle Bowman has followed through with a proposal to better align LFI ratings with firms’ actual capabilities and financial condition. The proposal seeks to address the anomalies created when a firm must be downgraded based on discrete practices that may not align with the overall strength and practices of the firm. Downgraded firms face enforcement actions including required “4M” agreements for FHCs¹ that restrict their ability to grow and divert resources towards remediation activities, despite otherwise strong financial performance and governance practices. By taking the first step to adjust the ratings framework and solicit input on other changes that should be made, the Fed is taking concrete steps to fulfil the commitment from Bowman and other agency leaders to address incongruities created by the current supervisory ratings process.

Relief from ratings impact, not from rigorous expectations. While the proposal would remove the “hard wiring” that creates holistic downgrades for what might be limited concerns, because the proposal only addresses the ratings of holding companies (and not their subsidiary institutions) the Fed acknowledges that only a small number of firms would see immediate upgrades. In addition, the supervisory process itself remains unchanged: firms with less-than-satisfactory component ratings will continue to face matters requiring attention (MRAs), enforcement actions at examiners’ discretion and rigorous expectations around maintaining and testing controls. In that context, the proposal is best viewed as a structural correction, not a reduction in supervisory expectations or compliance demands, for now. Based on the questions in the proposal and Bowman’s commitment to “take a fresh look” at supervision, we expect that there is more to come, both in terms of other ratings frameworks and on-the-ground examination practices.

What’s the bottom line? Redefining what it means to be well-managed and removing the enforcement presumption marks a tangible shift toward aligning supervisory ratings with actual financial strength and gives the Fed more flexibility to evaluate firms holistically. Firms should expect more changes from this Administration but should remain aware that those with deficiencies will still face meaningful remediation demands.

Banks exceed capital minimums in 2025 stress tests

What happened? On June 27^th, the Fed released the results of its 2025 Dodd-Frank Act Stress Test (DFAST) – i.e. its annual capital stress test for large banks.
What are the specific results? All 22 large banks tested remained above regulatory minimums under the severely adverse scenario. Specifically:
- The aggregate common equity tier 1 (CET1) capital ratio declined by 1.8 percentage points from 13.4% to 11.6%, down from a 2.8 percentage point decline in 2024, and the smallest drawdown since 2020. Nearly all banks in scope had a reduction in capital depletion in the stress test.
- Aggregate projected losses exceeded $550 billion, including losses of $158 billion in credit cards; $124 billion in commercial & industrial loans; and $52 billion in commercial real estate. This was slightly higher than the $541 billion in losses projected in 2024.
Why was the capital decline less severe than in recent years?
- This year’s severely adverse scenario was less severe, with milder assumptions for unemployment, GDP contraction, and asset price declines compared to the 2024 scenario
- There was a change in how private equity and merchant banking are modeled – they are now included in the macroeconomic scenario rather than the global market shock
- Pre-provision net revenue (PPNR)² was higher, reflecting recent bank profitability and favorable trading activity
What’s next? Stress capital buffers (SCBs)³ for each bank will be finalized by August 31st, as required under the Fed’s capital planning rule. The SCB becomes effective on October 1st and applies for the next four quarters, aligning with the beginning of the firms’ capital planning cycle. The Fed is working to finalize its recent proposal to average the SCB over two years and has stated it will publish its supervisory models and scenario design framework for public comment later this year.

Our Take

Less stress – for now. The 2025 DFAST results are being welcomed by the banks and shareholders, as they send a strong signal that large banks have sufficient capital to withstand a harsh economic downturn. In the near term, this means that they will be able to increase distributions to shareholders and broadly will have lower capital requirements. This year’s milder outcome was shaped by a softer scenario, favorable model adjustments and the strength of the banks’ recent profitability. However, the open SCB averaging proposal raises major questions for the banks as they plan their capital actions – at this point, it is uncertain whether the SCB will be based on this year’s results alone or be averaged with last year’s results, as the Fed has proposed to reduce year-over-year volatility. We expect the Fed to resolve this uncertainty before SCBs are finalized in August. Overall, the enacted and proposed changes to the stress testing framework signal a new era of the regulators listening to substantive industry feedback and providing capital relief where it is warranted.

Prepare for more transparency. The Fed is also preparing to release its stress testing models for comment, creating greater transparency into its stress testing methods. This transparency will enable firms to compare internal assumptions to regulatory approaches with more clarity than ever before, identify drivers of differences in results, and better predict the Fed’s stress loss consumption. Rather than treating stress testing as a reactive exercise, firms will be able to build more durable, data-driven capital frameworks that account for internal risk views and supervisory logic. This transparency may ultimately reduce capital friction and support more confident strategic execution.

What’s the bottom line? The short-term signal is capital relief, but the long-term picture is still forming. Firms that use this window to strengthen capital strategy and prepare for deeper transparency will be best positioned to adapt as the framework continues to evolve.

Financial Stability Board releases nonbank leverage recommendations

What happened? On July 9th, the Financial Stability Board released a report providing non-binding recommendations to address risks created by leverage in nonbank financial institutions (NBFIs) such as hedge funds, pension funds and insurers.
What does the report say? The report recognizes progress in national and international policy frameworks that address NBFI leverage recognized as an underlying cause to recent market dislocations (e.g., 2020 market turmoil, 2021 Archegos default, 2022 commodities market turmoil, and 2022 liability-driven investment crisis involving UK Gilt market), but it identifies the need for customized and coordinated implementation of the frameworks to lessen the risk of market disruption and need for central bank intervention.
What do the recommendations include? The report contains a broad series of recommendations across the following categories:

1. Risk identification and monitoring. The report calls for national authorities to implement domestic frameworks designed to identify and monitor leverage risks represented by nonbanks. It suggests that these frameworks include metrics such as:

a. Gross, net and adjusted measures of leverage;
b. Collateralization, margin and liquidity risks related to leverage;
c. Sensitivity to market risk; and
d. Concentration risk

As part of risk identification and monitoring efforts, the report recommends that national authorities consider the quality, frequency and timeliness of available data and address related challenges.

2. Managing leverage in core markets. The report recommends that national authorities consider various policy measures to address identified risks, including:

a. Activity-based measures such as minimum haircuts or initial margin requirements for non-centrally cleared securities financing transactions, enhanced margin requirements in derivatives markets, and increased use of central clearing;
b. Entity-based measures such as direct limits on leverage and indirect leverage restraints linked to specific risks; and
c. Concentration-based measures such as large exposure limits and large position reporting requirements

3. Interlinkages with systemically important financial institutions. To address potential financial stability risks stemming from interlinkages with other financial institutions, the report recommends that authorities implement the Basel Committee on Bank Supervision’s guidelines on counterparty credit risk and review disclosure practices between leverage providers and nonbank counterparties.

4. Regulatory coordination. The report recommends that authorities identify whether different regulatory standards create opportunities for arbitrage and engage in cross-border cooperation efforts including those related to risk monitoring and joint supervisory reviews.

Our Take

Reasonable recommendations that are unlikely to gain significant traction. NBFIs are important sources of market liquidity, but as seen by the four mini-crises in recent years, they come with significant risks. The FSB correctly identifies this growing risk and its recommendations largely align with leading market practices. However, any policy changes would need to be implemented by national authorities – and in the US, we do not expect to see movement on most of the recommendations considering the Administration’s deregulatory agenda. Certain areas, such as increased cross-border regulatory coordination and greater use of central clearing, may see some support, but the recommendations around activity-based and entity-based measures are highly unlikely to see traction under the current Administration barring a compelling imperative such as a major crisis.

Regardless of whether any policy initiatives move forward, banks and NBFIs should remain aware of the risks highlighted by the report and work to mitigate these risks. Vigilance in counterparty credit risk and margining requirements among all major counterparties is the practical mitigant to concentrations, crowded positions and market dislocations.

What’s the bottom line? The FSB’s report correctly identifies the growing risk presented by NBFI leverage, but its policy recommendations are unlikely to gain significant traction considering the U.S. Administration’s deregulatory agenda.

Crypto and fintech payments firms apply for charters

What happened? The past several weeks have seen notable new charter applications from crypto firms and fintechs. Notably, two large crypto firms and a fintech payments firm applied for a national trust charter with the OCC, while a bank focused on crypto clients applied for a de novo bank charter with the OCC.

Why is a trust charter different from all other charters? Obtaining a trust charter would allow the crypto and payments firms to provide a limited number of services such as managing assets and providing custody, but it does not allow for deposit-taking. Firms with a trust charter would be able to apply for Fed master accounts, which would allow them to access payments rails. Unlike full bank charters, firms with trust charters are not required to obtain FDIC insurance.

What’s next? The OCC’s decisions regarding the charter applications remain pending.

Our Take

The road to Fed payments rails access is no simple highway. The Administration’s crypto-friendly policy agenda and openness to special purpose chartering – along with the expected passage of stablecoin regulatory framework legislation (the GENIUS Act) – has generated substantial interest from crypto and fintech firms to apply for charters. The trust charter route is attractive for many crypto firms as it would allow them to issue stablecoins and custody assets but would not require forming a Bank Holding Company or obtaining FDIC insurance.

However, obtaining a trust charter will still require a significant amount of effort and come with high expectations in areas such as capital and liquidity, reporting, and BSA/AML compliance that will require a heavy lift for many firms. And importantly, firms applying for trust charters that are seeking access to the Fed’s payments rails should remain aware that they will be considered a “tier 3” applicant, and we have only seen one tier 3 applicant get approved. While the OCC has signalled its support for special purpose charters, we expect the Fed to remain cautious with its approach to granting access to its payment system.

What’s the bottom line? As crypto and fintech firms pursue trust charters, they should remain aware of the high regulatory expectations for approval and the potential uphill battle for access to the Fed’s payment rails.

On our radar

These notable developments hit our radar recently:

OCC published Semiannual Risk Perspective. On June 30th, the OCC published its Semiannual Risk Perspective for spring 2025. The report said that commercial credit risk is increasing, citing sustained higher interest rates, geopolitical tensions, and pockets of stress in commercial real estate. It warned that refinance risk remains high for loans originated in lower-rate environments, especially those backed by declining property values. The OCC also noted that operational risk continues to be elevated due to rising cyber threats, evolving fraud schemes, and growing reliance on third-party providers. Market and liquidity risk remain stable overall, but the OCC cautioned that interest rate volatility and unrealized investment losses merit continued monitoring.

Trump signed OBBB. On July 4th, President Trump signed the One Big Beautiful Bill Act (OBBB), which cuts the CFPB’s funding cap by nearly 50%, from 12% to 6.5% of the Federal Reserve’s 2009 operating expenses (adjusted for inflation).

Gould confirmed as Comptroller. On July 10th, the Senate confirmed Jonathan Gould to serve of Comptroller of the Currency.

SEC issues disclosure guidance for crypto asset ETPs. On July 1st, The SEC’s Division of Corporation Finance released guidance outlining its expectations for disclosures in registration filings of crypto asset exchange-traded products (ETPs). Issuers are expected to tailor disclosures to the specific structure and risks of their products, including investment objectives, characteristics of the underlying crypto assets, custody arrangements, and NAV calculation methods. The guidance also highlights the need for transparent risk factor disclosures, identification of service providers, conflicts of interest, and financial statements at both the trust and series level.

CFPB settled Military Lending Act violation lawsuit. On July 11th, the CFPB announced a proposed settlement with a national operator of over 1,000 pawnshops and its subsidiaries to resolve allegations of Military Lending Act (MLA) violations. The companies were accused of charging active-duty servicemembers and their families interest rates above the MLA’s 36% cap, using prohibited arbitration clauses, and failing to provide required disclosures. The stipulated judgment would require full consumer redress and a $4 million civil money penalty.

FDIC to meet. On July 15th, the FDIC Board of Directors will meet to consider proposed amendments to guidelines for appeals of material supervisory determinations; proposed rulemaking regarding adjusting and indexing part 363 and certain FDIC regulatory thresholds; and a request for information regarding industrial banks, industrial loan companies, and their parent companies.

Agencies propose call report revisions aligned with capital proposal. On July 10, 2025, the FDIC, Federal Reserve, and OCC proposed revisions to the FFIEC 031 call report to reflect changes consistent with their recent proposal to modify the enhanced supplementary leverage ratio (eSLR). Comments on the proposed revisions are due by September 8th.

HUD and OMB terminate anti-discrimination housing policies. On July 10th, the Department of Housing and Urban Development (HUD) and the Office of Information and Regulatory Affairs (OIRA) announced the termination of policies introduced under the Biden Administration’s Property Appraisal and Valuation Equity (PAVE) task force. The directive primarily applies to two rules, one required appraisers and mortgage lenders to comply with the Fair Housing Act and anti-discrimination laws; the other required appraisers to identify, document and correct biases or discrimination that could factor into an appraised value.

¹ _{Regulation Y (12 C.F.R. 225.83) delineates required actions of the FHC and the Fed upon a ratings downgrade.}

²_{PPNR refers to a firm’s net revenue before accounting for credit losses. It includes net interest income and non-interest income, minus non-credit-related expenses.}

³ _{The SCB is equivalent to the maximum decline in a firm’s CET1 capital ratio under the supervisory severely adverse scenario, plus four quarters of planned common stock dividends, subject to a 2.5% minimum. The SCB is added to minimum capital requirements to determine the total capital buffer a firm must maintain.}