Good Intentions — Bad Results

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Meg Tahyar is head of Davis Polk’s Financial Institutions practice and a member of its Fintech team. She provides strategic bank and financial regulatory advice to many of the largest U.S. and non-U.S. financial institutions, regional banks, fintechs, cryptocurrency exchanges and other digital assets companies.

Something has gone amiss with banking supervision. 

My grandmother often repeated the proverb, “the road to hell is paved with good intentions.” I submit that the good intentions forged in the financial crisis have led banking supervision down the wrong path. Traditional bank examinations were qualitative judgments built around a quantitative core — especially credit, liquidity and interest rate risk.¹ The shock of the financial crisis, and the rhetoric of “never again,” led supervisors to over-focus on culture, reputation and the soft elements of management judgment. 

Unworkable in Practice

This focus had the best of intentions and yet, in practice, grew increasingly unworkable. Reputational risk became a disguise for political and social goals — or a means to debank legal but disfavored businesses. Signals from the top to line supervisors were confused. They were told not to manage the bank but that they owned the problems.  We lost the key mission of bank supervision, which is to “promote safe, sound and efficient banking, and an efficient banking system that supports a strong economy.”²

The problems became so severe that evidence of the wayward supervisory culture entered the public domain, breaching the nigh-impenetrable veil of secrecy that is confidential supervisory information:

• The “odd mismatch” of two-thirds of the large financial institutions being rated a 3 or less in management at a time of strong capital and liquidity.³

• Regulators’ increasing habit of leaking confidential supervisory information when it suited them.⁴

• The rise of risk governance consent orders or memoranda of understanding with massive action plans—helped along by the consultant-industrial complex — with overwhelming process around validation and sustainability.

In the meantime, constraints on asset growth or branch expansion imposed as supervisory correctives picked winners and losers — especially when the penalty box lasted for years. Regulators held back innovation and blocked bank mergers.

The Road Not Taken

The biggest miss of all was the generational error of not focusing enough on interest rate risk as the Fed sharply raised interest rates in 2022.⁵ Where was the “forward-looking” supervision during that time period?  Based on anecdotal evidence from conversations with dozens of bankers and confidential supervisory information I’ve seen in my practice, it is my hypothesis that banking supervisors did not focus on interest rate risk until very late in 2022, when it was too late.⁶ Bank management who got it right did so based on their own management judgment, not because the risk was identified by examiners whose job was to “promote safe, sound and efficient banking” and spot this massive financial risk. The timeline revealed in the Barr Report for Silicon Valley Bank (SVB) reflects a system wide issue. It would be wrong to blame line supervisory staff — it was the tone from the top.⁷ If my anecdotal experience is skewed or not accurate, I invite the banking agencies to prove me wrong by releasing aggregate anonymized data on the number of exam observations, Matters Requiring Attention (MRAs) and Matters Requiring Immediate Attention (MRIAs) during that period which focused on the substance of interest rate risk in a forward-looking manner.⁸

Worse, the auditing profession’s creation of the three lines of defense, originally designed to protect auditors more than anything else, led to over-indexing on process and checklists, both by the supervisory staff and at the banks themselves. Coincidentally it also led to many more jobs for risk, compliance and audit professionals. The OCC’s heightened standards also drove an explosion in process oriented documentation. This enormous investment in internal supervision⁹ led to the distraction of minuting management committee meetings — many times in almost a transcript style — and an insistence by supervisory staff that banks maintain logs of “effective challenge.” It also led to over-indexing on the creation of committees, processes and checklists that created the appearance of action but ultimately did not contribute to safety and soundness. As Governor Barr’s SVB report  amply illustrates, bank management and supervisory staff can get so overloaded with process that they miss material financial risks. This focus on process is a Siren, alluring in its beauty on paper but ultimately a distraction that puts banks at risk of dashing themselves to pieces on the rocks of real risk.

Winning the Culture War

Against this backdrop, recent actions by the Federal Reserve, the OCC and the FDIC are a welcome shift in leadership and tone from the top. The well-intentioned but misused reputational risk is now off the table, and there will be definitions of what amounts to “unsafe” and “unsound.” The OCC has announced a review of heightened standards and pulled back on duplicative recovery plans.¹⁰ The FDIC has strengthened its examination appeal framework and its ombudsman process is more robust.¹¹ At the Fed, stress testing is more transparent, the Large Financial Institution (LFI) rating system has been revised in a sensible way and, after years of neglect and a massively changed banking sector, there are finally plans to modernize the CAMELS system.¹²

The supervisory staff at the Federal Reserve took another important step with their publication of a new Statement of Supervisory Operating Principles for bank examinations (and the promise of more reforms to come). The priority is now on material financial risks and not on process and checklists. Vice Chair Bowman correctly characterized it as “strengthening” supervision. She has noted that “Our supervisory approach is not about narrowing our focus — it is about sharpening it.”¹³ And, critically, she noted that “This is not about what we are leaving behind — it is about building a more effective supervisory framework that truly promotes safety and soundness across our financial system, which is the Federal Reserve’s core supervisory responsibility.”¹⁴ The idea is to prioritize material financial risk and avoid becoming “distracted from this priority by devoting excessive attention to processes, procedures and documentation.”¹⁵

These recent revisions, like previous revisions under former Vice Chair Quarles and like Governor Barr’s focus on “speed, force, and agility,” are not an on/off switch. We should be wise enough to see that reforms are needed and not fall into the trap of assessing the changes through the lens of political divisions.¹⁷ Given the overall backdrop since the financial crisis it would be wrong to think in blanket terms like “desupervision” or “deregulation.” The standard for MRAs and MRIAs is higher but the reinstatement of supervisory observations means that examiners have back a tool that had been taken away from them. The limits on horizontal reviews do not eliminate them but cabin them away from some of the excesses of the past. Supervisory discretion or judgment is not off the table.¹⁸ The memo explicitly calls upon examiners to use their “reasoned judgment,” which I imagine is a welcome shift from duplicative validation checklists. Former Vice Chair Quarles wisely observed that “supervisory judgment cannot rest on instinct, experience, or after-the-fact rationalization. It must be anchored in evidentiary standards that are explainable, proportionate, and replicable. And that will depend on shared frameworks and established measurements that allow us to ‘show our work’ in culture risk governance and supervision.”¹⁹

Maintaining Momentum

The current leadership is off to a good start but there is more to be done.²⁰ There are also tensions between the culture of confidential supervisory information and securities law.²¹ There is a strong need for more transparency in supervision which can be accomplished without putting either supervisory staff or banks at risk. Much more aggregate anonymized data should be made public in a consistent and timely way.²² Internal guidance, such as the Fed’s Statement of Supervisory Operating Principles and the other steps laid out in that document, should be public. Why is the Large Institution Supervision Coordinating Committee operating manual not public? Why is examiner training and curricula not more transparent and public? Why have Former Vice Chair Quarles’ town hall speeches on supervision, which have been discussed in the media, not been made public, given their prominence in the Barr Report?²³ And, after a long period of time (35 years seems right to me), all confidential supervisory information, including exam reports and MRAs, should be made public.²⁴ One of the oddities of the current lack of transparency is that there are many who comment on bank supervision without ever having seen it in action or without ever having read an exam report or an MRA. It is impossible to know the successes and failures of banking supervisors and difficult to assess when bank management has taken a wrong path. An enhanced commitment to responsible transparency would be a good start.

The opinions shared in this article are the author’s own and do not reflect the views of any organization they are affiliated with.

^[1] The lasting paradigm changes put in place after the financial crisis, such as increased capital, liquidity, stress testing, living wills and other quantitative reforms have built upon this core quantitative tradition.

^[2] See Speech by Governor Michael S. Barr, The Case for Strong, Effective Banking Supervision (Nov. 18, 2025).

^[3] See Speech by Vice Chair for Supervision Michelle W. Bowman, Taking a Fresh Look at Supervision and Regulation (June 6, 2025).

^[4]  Since the financial crisis, there have been by my count at least 26 leaks of confidential supervisory information to the news media. Examples on file with the author.

^[5] The Federal Reserve raised the target range for the federal funds rate 11 times from a range of 0%-0.25% in March 2022 to 5.25%-5.5% in July 2023 for a total of 525 basis points in rate hikes.

^[6]  The Federal Reserve Bank of San Francisco and the California Department of Financial Protection and Innovation communicated an MRA to Silicon Valley Bank due to deficiencies in its interest rate risk simulations on November 15, 2022. See California Department of Financial Protection and Innovation & Federal Reserve Bank of San Francisco, Silicon Valley Bank 2022 Camels Examination Supervisory Letter, (November 15, 2022), available at https://www.federalreserve.gov/supervisionreg/files/svb-2022-camels-examination-supervisory-letter-20221115.pdf.

^[7] Despite what is wrongly asserted in the Barr Report, it was not the town hall speeches by Former Vice Chair Quarles that led, 17 months after his resignation, to then current leadership missing interest rate risk’s impact on bank balance sheets.

^[8] I note that during the period of my hypothetical miss, that the examination teams were in full force before any recent cuts in staff.

^[9] See Howell E. Jackson & Margaret E. Tahyar, Financial Regulation: Law and Policy (4^th ed. 2025) at 951-2.  In the textbook, we coined the terms “external supervision” to refer to supervision by examiner and “internal supervision” to refer to the compliance, risk management, internal audit and other activities performed by the bank or private third party. By distinguishing external and internal supervision, we invited readers to consider whether these two forms of supervision are “complements or substitutes or both.”

^[10] Remarks of Jonathan V. Gould, Comptroller of the Currency, Financial Stability Oversight Council (Sept. 10, 2024), https://www.occ.gov/news-issuances/news-releases/2025/nr-occ-2025-88a.pdf.

^[11] In 2024, banks in total went a combined 1-for-17 in the final supervisory appeal decisions published for the year, and the 1 represents only a partial win by a bank in an SARC appeal decision where the FDIC upgraded its composite rating from “4” to “3.” Decision of the Supervision Appeals Review Committee, Case No. 2024-05 (Dec. 9, 2024), https://www.fdic.gov/laws-and-regulations/sarc-2024-05-1292024.

^[12] CAMELS is an acronym for Capital adequacy, Asset quality, Management, Earnings, Liquidity, Sensitivity to market risk.

^[13] See Board of Governors of the Federal Reserve System, Federal Reserve Board Releases Information Regarding Enhancements to Bank Supervision, Press Release (Nov. 18, 2025), available at https://www.federalreserve.gov/newsevents/pressreleases/bcreg20251118a.htm.

^[14] Ibid.

^[15] Mary Aiken & Julie Williams, Statement of Supervisory Operating Principles (Oct. 29, 2025). Published Nov. 18, 2025. https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20251118a1.pdf\ [hereinafter Statement of Supervisory Operating Principles].

^[16]  See Colby Smith & Stacy Cowley, The Fed Is Cutting Bank Oversight. Critics See Risks., N.Y. Times, Nov. 17, 2025. https://www.nytimes.com/2025/11/17/business/fed-bowman-bank-oversight.html?searchResultPosition=1

^[17]  Indeed, Raj Date, an Obama appointee, made critiques of banking supervision in an Open Banker blog post last September. “Banks Aren’t Over-Regulated, They Are Over-Supervised” https://openbanker.beehiiv.com/p/rajdate.

^[18]  See Statement of Supervisory Operating Principles, supra note 15, at 1 (“Examiners and other supervisory staff should be focused on the responsibility of the Board to promote the safe and sound operation of banks and the stability of the U.S. financial system. In furtherance of this mission, examiners are encouraged and expected to use their reasoned judgment.”).

^[19]  See, e.g., Randal K. Quarles, Opening Letter to Supervisors on Supervision, Starling Insights 7 (Nov. 7, 2025).  For a counterargument, see Brian Peters, Federal Reserve Supervision, Perspective on Risk Substack (Nov. 19, 2025), available at https://substack.com/home/post/p-179360430.

^[20]  For an excellent paper on how to reform CSI, see Maggie Pizzo Cimbalista, Confidential Bank Supervision in America: Historical Tensions and Modern Pressures (Aug. 28, 2025), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5412499.

^[21]  See Peter Conti-Brown, Patrick Corrigan & Jeffery Y. Zhang, Is Confidential Supervisory Information Material to Investors? Evaluating the Conflict between Banking and Securities Law (Sept. 20, 2025), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5511299.

^[22]  Statement of Margaret E. Tahyar before the Subcommittee on Financial Institutions of the House Committee on Financial Services, The Art of Supervision: What We Don’t Know (Apr. 29, 2025) (hearing titled Regulatory Overreach: The Price Tag on American Prosperity).

^[23]  My FOIA request for them has been denied, after months of delay and not meeting deadlines, on the basis that they were “pre-decisional.” I remain confounded how speeches to thousands of staffers are “pre-decisional.”

^[24]  A long period is necessary so that those in bank management or on boards and the supervisory staff will have been long gone by the time it is made public. Otherwise, there could be market reactions and also an impact on the incentives of individuals which should be avoided.

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