Banking and Finance Law Daily Wrap Up, PRUDENTIAL REGULATION—Fed announces plans to restructure supervision, update community bank regulations, (Oct 7, 2026)

By A. Bryan Gerepka

Fed Governor Bowman says the new approach clarifies accountability and decision-making and enables a consistent application of supervision.

The Federal Reserve Board plans to reorganize supervision into five regions, based on state borders, rather than Reserve Bank District boundaries, to enhance accountability, accelerate decision-making, and ensure consistent supervisory approaches, the Fed’s Vice Chair for Supervision, Michelle W. Bowman said. Bowman announced the changes during an Oct. 6, 2026, speech at the 2026 Community Banking Research Conference.

In the speech—Modernizing the Regulatory and Supervisory Landscape—Bowman also outlined plans for tailored regulatory and supervisory reforms to support community banks, including modernizing asset thresholds, improving supervisory ratings, and providing clearer compliance guidance. The event was sponsored by the Fed, the Conference of State Bank Supervisors (CSBS), and the Federal Deposit Insurance Corporation.

New structure enhances accountability, efficiency. Under the new five-region structure, each supervisory unit will be led by a regional leader who is accountable and responsible for all supervisory activity within that region. In addition, Bowman said the regional structure creates operational efficiency and supports more effective coordination with federal and state regulators. “It simplifies our leadership structure while preserving local supervision by examiners,” she stated, adding that the examiners will remain in the existing Reserve Bank locations across each region, and will continue to oversee the banks they currently supervise. “This approach clarifies accountability and decision-making and enables a consistent application of supervision.”

Dysfunctional current structure. According to Bowman, the new approach replaces a committee-heavy supervision structure that had become a source of plausible deniability, blurring accountability for acting on identified risks. She cited an independent review conducted by the Starling Advisory Group into the 2023 collapse of Silicon Valley Bank. The review identified a long-standing structural mismatch between decision-making authority and accountability: while the Fed Vice Chair for Supervision is responsible for the supervisory function, the actual oversight is conducted by the 12 individual Reserve Banks. According to the Starling review, this mismatch is exacerbated by a “long-standing culture of risk aversion” and “committee-based decision-making”, which led to further inaction.

CSBS applauds restructuring. “We look forward to working with the Federal Reserve as it implements a regional supervision structure,” said CSBS President Brandon Milhorn. “Vice Chair for Supervision Bowman understands the critical partnership between the Federal Reserve and state supervisors. Working together, we can continue to build on this partnership and ensure a consistent, stable, and durable supervisory environment for banks.”

Reform Community Bank Regulations. Bowman also highlighted several regulatory and supervisory reforms that the Fed hopes to finalize later in 2026, to provide community banks with more proportionate rules while maintaining strong capital, liquidity, and safety-and-soundness standards (see Banking and Finance Law Daily, Oct. 3, 2024). Bank regulation and supervision must be appropriately tailored, calibrated, and updated over time, Bowman argued, and “supervision should reflect a bank’s complexity, activities, business model, and risk profile—not asset size alone.”

• Modernize outdated thresholds: The Fed plans to raise the fixed-dollar thresholds and add automatic updates every five years to account for inflation and economic growth. Fixed dollar thresholds and the longstanding $10 billion community-bank definition can become irrational over time, Bowman argued.

• Modernize Regulation O, the insider-lending rule, whose limits have not been comprehensively updated since 1979, Bowman noted. In July 2026, the Fed released a proposal to update transaction limits to Regulation O as its fixed transaction limits may create unnecessary administrative burden for community banks while no longer being appropriately calibrated to current conditions. The proposal would also address “unnecessary” application of Regulation O to passive interests in companies held by investment funds; codify other statutory requirements; and incorporate long-standing regulatory interpretations. The Fed also proposed that Regulation O should not apply to bank lending to fund group portfolio companies if the fund group meets certain criteria suggesting it would have limited influence over bank lending decisions.

• Rethink asset size cutoffs. The Fed will consider broader changes to asset-size categories and large-bank tailoring. The aim is to avoid automatically moving basic, noncomplex banks into more demanding supervisory tiers solely because they cross a static asset threshold, she stated.

• Tailor oversight to actual risk. As outlined in the Statement of Supervisory Operating Principles, introduced in October 2025, the Fed will continue examiner training, outreach, and structural reforms to reinforce a material risk-based approach to examinations. Bowman noted that in recent years, “our examinations had drifted to focus on process over substance, prioritizing checklists of requirements instead of applying judgment and expertise to evaluate safety and soundness.” The new approach will focus on identifying material vulnerabilities early and taking prompt, proportionate action, she stated.

• Revise CAMELS ratings: Proposed changes would make ratings reflect the financial condition and material financial risk and provide clarity on each component’s impact on the composite rating. Moreover, the proposal also provides transparency and clarity to the assignment of a “Management” rating. The “M” rating will no longer independently determine a bank’s composite rating.

• Provide clearer guidance: The Fed is publishing more examination material and community-bank-specific compliance tools, including guidance on third-party risk management, so that banks understand the expectations before examinations

Support market access and reduce reporting burden. Bowman also touched on additional plans to support community banks. They include the following:

• Modernizing bank-merger analysis: The Fed plans to revisit competitive analysis that it says understates competition from credit unions, nonbank lenders, Farm Credit institutions, and branchless banks, particularly in rural and underserved markets.

• Encouraging new-bank formation: The Fed is also expected to clarify approval standards, follow reasonable processing timelines, and use conditional approvals where appropriate for de novo banks (see Banking and Finance Law Daily, July 8, 2026).

• Streamlining Call Reports: The FFIEC is considering feedback on how to reduce unnecessary reporting burden for filing banks (see Banking and Finance Law Daily, Dec. 10, 2025).

Companies: Conference of State Bank Supervisors; Silicon Valley Bank

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