{{item.videoDuration}}
{{item.title}}
{{item.text}}
{{item.videoDuration}}
{{item.text}}
Change remains a constant in financial services regulation
Read "our take" on the latest developments and what they mean.
Regulators on the Hill
What happened? On December 2nd, Fed Vice Chair for Supervision Michelle Bowman, OCC Comptroller Jonathan Gould, FDIC Acting Chair Travis Hill and NCUA Chair Kyle Hauptman testified before the House Financial Services Committee. The hearing came the day after the Fed released its semiannual supervision and regulatory report.
What was discussed at the hearing? Key themes included:
- Reducing regulatory burden on community banks. All three banking regulators supported tailoring and streamlining requirements for smaller banks. Bowman specified that the Fed’s agenda includes increasing outdated regulatory thresholds, improving the BSA/AML framework to avoid unnecessary burdening smaller banks (including by adjusting the CTR and SAR thresholds), and tailoring other requirements where possible. She also called for tailoring the M&A and de novo chartering processes for community banks, including by updating the Fed’s merger analysis to accurately consider competition among small banks.
- Supervision. Bowman, Gould and Hill highlighted changes to supervision consistent with the recently-released Fed memo and the joint proposal from the OCC and FDIC that would require examiners to tie MRAs to material financial harm or violations of law. Bowman stated that the Fed will propose a regulation thematically similar to the OCC and FDIC’s proposal and that she is reviewing the CAMELS framework with the intent to establish clear metrics and parameters for all the components, including Management, to ensure transparency and objectivity.
- Basel III. Bowman stated that her approach to a revised proposal will avoid “reverse engineer(ing) changes to achieve pre-determined or preconceived approached to capital requirements.” She also noted that she will look to revise the capital treatment of mortgages and mortgage servicing assets to avoid causing banks to reduce their participation in mortgage lending. When asked by Rep. Andy Barr (R-KY) if she would commit to a capital neutral proposal, she responded that she does not have any preconceived notion around to-be-proposed capital requirements.
- Reviewing regulatory tailoring. Bowman stated that she is reviewing the existing regulatory framework to “eliminate outdated, unnecessary or overly burdensome rules” and expects that the review will create substantive change.
- Digital assets. Bowman stated that she is working with the other banking regulators to develop capital, liquidity, and diversification regulations for stablecoin issuers as required by the GENIUS Act. She also noted that the regulators need to provide clarity on treatment of digital assets, including guidance on permissibility of activities and regulatory feedback on proposed new use cases. Hill explained that he expects the FDIC to release a proposal for GENIUS Act application requirements by the end of the year and a proposal for stablecoin issuer prudential requirements in early 2026.
- G-SIB surcharge. Bowman stated that the Fed is working to refine the G-SIB surcharge framework to strike a balance between safety and soundness, ensuring financial stability and promoting economic growth.
- Debanking. Bowman stated that Fed is considering a regulation to prevent Board personnel from encouraging, influencing or compelling banks to refuse to bank a customer due to political or religious beliefs, associations, speech or conduct. Gould highlighted that the OCC is reviewing previous activities of large national banks for instances of debanking and that it is considering options for evaluating whether non-financial factors may have impacted core banking functions such as credit underwriting.
What did the Fed supervision and regulation report say? The report states that US banks have strong capital and liquidity levels, high profitability and healthy loan growth. It notes that new findings and outstanding findings have declined in the first half of 2025 compared with year end 2024, with the two most cited categories being (a) IT and operational risk and (b) management, risk management and internal controls. It also highlights supervisory priorities:
Capital and Credit |
Liquidity |
Other |
|
|
|
|
|
|
Our Take
Sweeping changes to supervision and regulation – with more to come.
This week’s hearing underscored the significant changes already made to reduce regulatory burden, increase transparency, and refocus supervision on material financial risk while making clear that the regulators are going full steam ahead to continue their ambitious agenda. These changes have materialized in the Fed’s report as both new and outstanding MRAs have dropped since the previous report, but we expect to see more dramatic shifts in the next report as findings related to the two most cited categories – operational risk and management – will significantly decrease considering the agencies’ supervisory focus on material financial risk.
Many of these changes and agenda items have been on the industry’s wish list, demonstrating the regulators’ openness to listen to and address industry concerns. For example, Bowman’s statements around reviewing Basel III capital requirements around mortgages and mortgage servicing rights directly address a strong push from industry groups. However, except for opposing CFPB staff cuts and directional shifts, Democrats at the hearing provided little pushback to the agencies’ changes, perhaps recognizing the need to address affordability issues and bring certain activities back into the traditional banking sector and away from unregulated nonbanks.
Looking ahead
The regulators made clear that they are committed to advancing an ambitious agenda – both by their statements at the hearing as well as their rescission just today of leveraged lending guidance (see item 3 below). As guidance can be rescinded with the stroke of a pen, we expect that other guidance such as those around third-party risk management and model risk management are next on the list for rescission or revision.
As we look ahead to bigger rulemakings, we expect to see significant developments continue to unfold in the first half of 2026, with (1) a Basel III proposal that scales back previously proposed gold plating and accounts for other US capital requirements; (2) adjustments to the current regulatory tailoring framework, including potentially raising thresholds for and indexing them to inflation as well as reexamining requirements of Category IV banks; (3) reexamination of OCC’s heightened standards for large banks; (4) a Fed proposal to define “unsafe and unsound” and MRA standards; and (5) modifications to ratings systems to increase transparency and focus on material financial risk. While agencies will begin proposing application policies and prudential standards to implement the GENIUS Act early next year, the debate around whether offering rewards or other incentives violates the Act’s prohibition on interest continues to be fought behind the scenes and it remains unclear when we will have an answer. Looking further ahead, we expect regulators to turn their attention to liquidity after capital reforms are complete, potentially including revisiting internal stress testing guidance and further tailoring the liquidity coverage ratio.
Banking agencies finalize eSLR changes and propose changes for community banks
What happened? On November 25th, the Fed, FDIC and OCC:
- Finalized changes to the enhanced supplementary leverage ratio (eSLR) as well as corresponding changes to total loss-absorbing capacity (TLAC) and long-term debt (LTD) requirements.1 The final rule applies to U.S. global systemically important bank holding companies (GSIBs) and their insured depository institution (IDI) subsidiaries; and
- Proposed changes to the community bank leverage ratio. The proposal applies to qualifying community banking organizations, which are those with (a) less than $10b in total consolidated assets; (b) off-balance sheet exposures (excluding certain derivatives) of 25 percent or less of total consolidated assets; and (c) trading assets and liabilities of 5 percent or less of total consolidated assets.
What does the eSLR final rule do?
- Recalibrates the eSLR from its current fixed level of 2% of total leverage exposure to an amount equal to 50% of each firm’s GSIB surcharge as calculated using method 1.2 This would reduce effective minimum leverage requirements from 5% to a range between 3.5% and 4.25%, based on the current range of GSIB surcharges between 1% and 2.5%. For covered depository institutions, the eSLR buffer is 50% of the parent’s method 1 surcharge, capped at 1%, in addition to the 3% minimum SLR.
- Removes the eSLR from the “well-capitalized” threshold for GSIB IDI subsidiaries under the Prompt Corrective Action (PCA) framework.3 Instead, the eSLR will be implemented for these IDIs as a capital buffer standard, which if not met, will trigger restrictions on capital distributions – such as dividends and executive bonuses – without triggering automatic PCA reclassification and activity limitations for banks that fall below “well capitalized”.
- Reduces TLAC and LTD requirements, which currently incorporate the fixed 2% eSLR, to reflect the recalibration. For TLAC, the current requirement has a 7.5% minimum leverage component plus a 2% buffer based on the eSLR. The rule replaces this fixed buffer with a new TLAC leverage buffer equal to the new GSIB-surcharge-linked eSLR. GSIBs are currently required to hold external LTD equal to 4.5% of total leverage exposure (based on a 3% SLR plus 2% eSLR minus a 0.5% capital depletion allowance), but under the rule, this requirement will be revised to 2.5% of leverage exposure plus the new recalibrated eSLR.
- Maintains inclusion of Treasuries and reserves. Consistent with the proposal, the final rule will continue to include Treasury securities and central bank reserves in the calculation of total leverage exposure. The proposal invited comment on whether Treasuries held-for-trading by broker-dealer subsidiaries should be excluded, citing concerns about market intermediation during stress.
What would the community bank leverage ratio proposal do?
- Reduce the leverage ratio for qualifying institutions from 9% to 8%, which is the minimum ratio permitted by statute; and
- Extend the grace period during which a community banking organization that fails to meet the qualifying criteria (detailed above) would be allowed to remain in the CBLR framework from two quarters to four quarters as long as it maintains a leverage ratio of greater than 7%.
What’s next? The eSLR rule will be effective on April 1, 2026, but banks may elect to voluntarily adopt the final rule's modified eSLR standards as of January 1, 2026. Comments on the community bank leverage ratio proposal are due January 30, 2026.
Our Take
Long-awaited structural relief is here…with more to come?
The eSLR recalibration will ease pressure on GSIBs that have been constrained in low-risk activities like Treasury intermediation and make it more likely that the binding constraint will instead be a risk-based measure. But important questions included in the original proposal – including whether broker-dealer Treasury positions should be excluded from the SLR denominator and what other leverage requirements should be revisited – did not materialize into any modifications in the final rule despite strong advocacy from impacted firms. We expect that the agencies will wait and see how banks handle periods of stress, especially regarding Treasury market liquidity, to determine whether additional relief is necessary.
These changes – along with recent changes to stress testing as well as upcoming changes to the GSIB surcharge and Basel implementation highlighted in this week’s Congressional testimony (see item 1 above) – reflect a coordinated intent to realign capital requirements with business model and systemic footprint. By tying the eSLR to the GSIB surcharge, they implicitly build in further change: any future revision to surcharge methodology will directly affect leverage thresholds. Further, the unanimous support from the Board for the Community Bank Leverage Ratio shows that there is interest and momentum for providing relief to smaller firms. Accordingly, all potentially impacted firms should take advantage of the open door for advocacy amidst the agencies’ renewed impetus to adjust the capital framework.
OCC and FDIC rescind leverage lending guidance
What happened? On December 5 the OCC and the FDIC announced the rescission of their 2013 Leverage Lending Guidance, and the OCC issued updated guidance to replace 2023 Guidance on Venture Loans.
What do these announcements do?
- The OCC and FDIC have rescinded the “Interagency Guidance on Leveraged Lending” (“2013 Guidance”), dated March 21, 2013, and the “Frequently Asked Questions for Implementing March 2013 Interagency Guidance on Leveraged Lending” (“2014 FAQs”), dated November 7, 2014. In place of this guidance, the agencies expect banks to manage leveraged lending exposures consistent with general principles for safe and sound lending.
- The OCC has rescinded OCC Bulletin 2023-34, “Commercial Lending: Venture Loans to Companies in an Early, Expansion, or Late State of Corporate Development" (referred to as “venture loans) and has released updated guidance that applies to this form of lending.
What’s next? The rescissions are effective immediately. Further rescission by the Federal Reserve of the interagency guidance on leveraged lending is expected.
Our Take
More flexibility and more accountability
The 2013 leveraged lending guidance has been subject to criticism over the past decade that it contained overly restrictive (and one-size-fits-all) limits that restricted credit availability without providing countervailing benefits to bank safety and soundness. While issued as guidance, in practice the limits presented were enforced by examiners as binding constraints, thus reducing banks’ abilities to participate in certain leveraged deals and shifting activity away from the traditional banking system. Similarly, the text of the venture loan guidance contained restrictive language that hobbled banks’ ability to provide credit to start ups. Pressure had been mounting from both industry and Congress to rescind these issuances and enable bank lending according to more principles-based safety and soundness requirements. Today’s rescissions are a significant step forward for commercial banks, and they also further the Administration’s administration priorities to encourage M&A transactions, credit availability and economic growth.
With the guidance rescinded, banks will be eager to compete with the private credit sector which has grown significantly following the introduction of the guidance. They now should decide whether current lending strategies, policies, and risk management standards – including risk appetite – require re-calibration. Given the consistent focus of supervision staff and agency leaders on financial risk, including credit risk, firms must ensure that stress testing, concentration limits, and oversight remain robust even without the specific regulatory limits and thresholds in place. Where institutions decide to increase leveraged and venture lending, it will be especially important to ensure that pricing models are calibrated to meaningfully capture additional risk and that management information, including monitoring for early warning indicators, provides adequate, timely data to support management and board oversight. Audit teams may likewise need to adjust audit scope away from the regulatory guidelines and towards a more judgmental evaluation of whether new policies standards align to a firm’s risk profile, and a focus on whether transactions comply with any new standards. Across all lines of defense, boards and management should be considering whether any planned expansion in leveraged or venture lending risk is matched with adequate skills, systems, and controls.
OCC takes steps to reduce BSA/AML regulatory burden for community banks
What happened? On November 24th, the OCC announced two initiatives aimed at reducing regulatory burden and further tailoring supervision for community banks (i.e., those with under $30b in assets):
- A new set of Community Bank BSA/AML Examination Procedures, which are intended to move away from a strictly procedural “same testing every cycle” approach by allowing examiners to (1) rely more heavily on banks’ independent testing; (2) carry forward certain prior-cycle conclusions where the bank’s risk profile is stable; and (3) calibrate the depth of transaction testing to the actual money laundering and terrorist financing risk.
- The termination of the OCC’s annual Money Laundering Risk (MLR) System data collection for community banks, choosing instead to assess risk through targeted information requests and examinations.
What’s next? The new examination procedures are effective for examinations beginning February 1, 2026, and the termination of MLR System data collection is effective immediately.
Our Take
Refocusing BSA/AML supervision on risk, not repetition
The new examination procedures reflect a clear effort to make supervision more risk-based and less mechanical. For institutions with credible risk assessments, effective governance, and strong independent testing, the ability of examiners to lean on existing work and to reuse certain conclusions from the prior cycle will reduce redundant testing and exam “rework.” The flexibility to scale transaction testing up or down based on the bank’s risk profile likewise suggests a more targeted use of supervisory resources.
Importantly, however, this is not a signal that BSA/AML expectations are being relaxed. Rather, the OCC is shifting emphasis from repeated, box-checking procedures to an assessment anchored in the quality of the bank’s own framework. Where examiners perceive elevated risk or weaknesses in controls, they retain full scope to expand testing and deepen reviews. Community banks looking to benefit from this more tailored approach will need to ensure that their risk assessments, monitoring, and independent testing are robust and well documented, and that they can clearly articulate their risk-based rationale during exams. This includes:
- Reviewing risk assessment practices to ensure the assessment analyzes money laundering and terrorist financing across products, services, customers and geographies; is updated during changes; and is integrated into monitoring, controls and governance;
- Enhancing independent testing to ensure it can be leveraged by examiners, including reviewing the comprehensiveness of the testing relative to risk profile and confirming the independence and qualifications of auditors; and
- Reassessing monitoring, alerting, governance, and technology processes to ensure they align to the OCC’s risk-focused examination model.
Relief on data collection, but greater expectations around banks’ own analyses
The decision to eliminate the annual MLR data collection provides tangible relief from a recurring regulatory reporting exercise that was unique to OCC-supervised community banks. That relief, however, comes with an implicit expectation that institutions can stand on their own in explaining their money laundering and terrorist financing risk profiles. Banks that previously treated the MLR template as their primary organizing framework for products, services, customers, and geographies may now need to strengthen internal methodologies so that they can demonstrate a similarly comprehensive understanding without a standardized OCC form.
Those firms building new internal methodologies should consider whether internal analytics and reporting fully replaces the MLR data and supports risk-focused testing decisions. At a minimum, this should include internal risk data; SAR/CTR trends; system outputs; and FinCEN data. Banks should ensure this data is complete, reconcilable, and able to support discussions about risk changes, SAR decisioning, and monitoring system performance.
On our radar
These notable developments hit our radar recently:
Federal Reserve Board seeks comment on potential strategic changes to check services amid declining check usage. On December 4th, the Fed requested public input on potential future changes to the check services offered by the Reserve Banks, citing declining check volumes, growth in electronic payments, increased fraud, and the need for significant infrastructure investments. Options the Fed listed in the notice included: 1) continuing maintaining the current check services, 2) simplification including discontinuation of certain offerings, 3) a substantial wind-down of check services, and 4) an upgrade to the existing check-processing infrastructure. Vice Chair Bowman issued a statement opposing the RFI, stating that it appears to favor discontinuing check services despite their role in the payments system. Treasury has already announced that it will phase out paper checks for most federal benefit payments effective September 30th, 2025, as covered by a previous Our Take here.
FDIC takes steps to streamline and tailor requirements through threshold updates and reporting review. On November 25th, the FDIC finalized a rule updating several regulatory thresholds to reflect historical inflation and establishing a process for future adjustments, with changes expected to provide meaningful burden relief for community banks and immediately exempt certain institutions from part 363 audit and reporting requirements beginning January 1st, 2026. Similarly, on December 1st, the FDIC, together with the Fed and OCC, requested public input on sources of regulatory reporting burden for institutions that file the Call Report, with comments due January 30th, 2026.
California Air Resources Board pauses enforcement of climate related financial risk reporting under SB 261. On December 2nd, CARB issued an enforcement advisory confirming it will not enforce the law’s January 1st, 2026 reporting deadline after the Ninth Circuit granted an injunction halting implementation while the appeal proceeds.
SEC Chair Paul Atkins outlines agenda to reform disclosure rules and encourage IPO activity at NYSE. On December 2nd, SEC Chair Paul Atkins delivered remarks at the New York Stock Exchange emphasizing plans to narrow and modernize the Commission’s disclosure framework by refocusing requirements on financial materiality and scaling obligations based on company size and maturity.
1TLAC is the minimum amount of capital and eligible liabilities that large banks must maintain to support resolution, part of which must be satisfied with LTD, which is unsecured debt with a maturity over one year that can absorb losses.
2Method 1 calculates a GSIB surcharge based on five systemic indicators – size, interconnectedness, substitutability, complexity and cross-jurisdictional activity – relative to other large U.S. banking organizations. Method 2 uses similar inputs but applies different weightings and includes a short-term wholesale funding metric, generally resulting in a higher surcharge. GSIBs are subject to the higher of the two methods for capital requirements.
3Under the PCA framework, an IDI that falls under the well-capitalized threshold can face consequences including restrictions on brokered deposits, dividend limitations, heightened supervisory scrutiny, and expansion constraints.
Our Take: financial services regulatory update – December 5, 2025
{{filterContent.facetedTitle}}
{{contentList.loadingText}}
{{contentList.loadingText}}
Follow us
