Community banks are the backbone of local economies, and the regulatory environment that governs them is undergoing significant change. In recent remarks to the California Bankers Association,1Bowman, Michelle W. (2026, January 7). “Modernizing Supervision and Regulation: 2025 and the Path Ahead.” https://bit.ly/BowmanJan26 Federal Reserve Vice Chair for Supervision Michelle Bowman outlined a vision for modernizing supervision and regulation which prioritizes risk-focused oversight, transparency and regulatory tailoring.
A shift toward pragmatic supervision
Vice Chair Michelle Bowman has made clear that the objective of modern bank supervision is not to eliminate risk, but to manage it effectively. Her approach is built on three foundational principles. First, the early detection and remediation of material financial risks, which are the core threats to safety and soundness. Second, tailoring supervision to reflect the size, complexity and risk profile of each institution, rather than relying on one-size-fits-all standards. Third, enhancing transparency in supervisory processes to foster trust and accountability. These priorities have been shaped by lessons learned from recent banking challenges, most notably the failure of Silicon Valley Bank, which exposed weaknesses in previous supervisory practices.
Key reforms already underway
Several critical changes have already been implemented as part of this modernization effort. The Federal Reserve introduced new Supervisory Operating Principles in late 2025,2Board of Governors of the Federal Reserve System. (2025, October 29). “Statement of Supervisory Operating Principles.” https://bit.ly/FedSOP25 designed to sharpen the focus of examinations and require early remediation of material financial risks. Examiners are expected to prioritize these financial risks and not be distracted by processes, procedures and documentation that do not pose a material risk to an institution’s safety and soundness.
Shortcomings identified by examiners should be addressed by making non-binding supervisory observations rather than issuing Matters Requiring Attention (MRAs) or Matters Requiring Immediate Attention (MRIAs). MRAs or MRIAs should focus on deficiencies that could have a material impact on the institution’s financial condition and should not be communicated in vague or broad language. The Supervisory Operating Principles further stress that termination of MRAs and MRIAs should not be delayed if the deficiency has been fully remediated, and examiners should generally not perform their own duplicative validations on MRA or MRIA remediations. Banks’ consideration of liquidity available from the Federal Home Loan Bank should not be discouraged when managing their liquidity.
The elimination of “reputational risk” as a supervisory measure and the rescission of climate guidance have further redirected supervisory resources toward risks that are truly material to safety and soundness.
Transparency and collaboration
Bowman stressed the need to revisit rules around confidential supervisory information, which currently restricts banks from sharing critical fraud and cybersecurity insights. The Federal Reserve plans to narrow these restrictions and publish supervisory manuals to provide greater clarity on expectations.
OCC and FDIC taking similar supervision changes
Both the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency have also taken significant steps to modernize their supervisory approaches in ways that closely parallel the Federal Reserve’s reforms. In October 2025, the agencies jointly proposed a rule3FDIC. (2025, October 7). “Agencies Issue Proposal to Focus Supervision on Material Financial Risks.” https://bit.ly/FDIC-OCC-Oct25 to clarify what constitutes “unsafe or unsound practices” under federal law, with a strong emphasis on limiting MRAs to issues that pose material financial risks. Similar to the aim of the Federal Reserve’s Supervisory Operating Principles, the joint rule seeks to reduce the regulatory focus on process, documentation and reputational concerns, ensuring that supervisory attention is directed toward risks that genuinely threaten the safety and soundness of institutions. Additionally, the OCC and FDIC have introduced clearer standards for supervisory communications, distinguishing between formal MRAs and non-binding observations, and promoting more transparent, proportionate, and predictable interactions with banks. The OCC has also reinforced its commitment to tailoring exam scope to the size and risk profile of each bank, and to relying on other regulators where appropriate to avoid unnecessary duplication.
These actions collectively signal a regulatory shift toward risk-focused, efficient and tailored supervision across all major banking agencies.
The FDIC has already begun implementing these principles in practice. In January 2026, it issued guidance instructing examiners to narrow the scope of examinations4Weinberger, Evan. (2026, January 12). Bloomberg Law. “FDIC Tells Staff to Narrow Bank Examinations Ahead of Final Rule.” https://bit.ly/FDICnarrow to core financial risks and to restructure or close MRAs that do not reflect material threats to a bank’s stability. Both agencies have moved to eliminate “reputational risk” from supervisory assessments,5OCC. (2025, March 20). “Bank Supervision: Removing References to Reputation Risk.” https://bit.ly/OCC25-04 making it clear that examiners should not take adverse action based solely on reputational considerations.6Federal Register. (2025, October 30). “Prohibition on Use of Reputation Risk by Regulators.” https://www.federalregister.gov/d/2025-19715
These actions collectively signal a regulatory shift toward risk-focused, efficient and tailored supervision across all major banking agencies.
What’s next for community banks
Looking ahead, Bowman has outlined several initiatives that will directly impact community banks. Among these is the proposed recalibration of the Community Bank Leverage Ratio (CBLR), reducing the requirement from 9% to 8% to provide greater flexibility while maintaining strong capital standards. She has also called for updating asset thresholds, noting that the current $10 billion threshold for community banks is outdated. Bowman supports indexing these thresholds to nominal GDP, which could raise the line to approximately $20-21 billion today and prevent banks that have grown with the economy from being subject to large-bank requirements as long as their complexity has not increased.
The FDIC also proposed a final rule in December 2025,7Federal Register. (2025, December 4). “Adjusting and Indexing Certain Regulatory Thresholds.” https://www.federalregister.gov/d/2025-21914 increasing and indexing various thresholds, including those related to annual independent audits, auditor report on internal controls and financial reporting and audit committee standards. Additional efforts include a review of call report requirements to eliminate unnecessary data collection and ongoing work to streamline the merger and activity approval processes, making them more predictable and less burdensome for community banks. Other changes will require Congressional action to adjust thresholds.
5 questions community bank CEOs should ask
Are we prepared for a shift in asset thresholds?
If thresholds move from $10B to ~$21B, how does that affect our compliance roadmap?
How are we prioritizing material financial risks?
Do our risk assessments and board reports emphasize interest-rate, liquidity, and credit risks?
Have we opted into the Community Bank Leverage Ratio (CBLR)?
Would the proposed 8% requirement change our capital strategy?
How will the regulatory shift impact our outstanding MRAs?
Which MRAs have we resolved, yet remain outstanding? Are we prioritizing resolving those that could actually pose a material risk?
How do we handle confidential supervisory information?
Are we maximizing collaboration opportunities without violating CSI restrictions?
This information is provided for general education purposes and is not intended to be legal advice. Please consult legal counsel for specific guidance as to how this information applies to your institution’s circumstances or situation.
