Bank supervision refers to the system of examining banks for how they comply with rules and manage risk. Bank supervision is a core part of the U.S. financial system. It helps ensure banks operate safely and support a resilient economy. But over time, bank supervision has lost sight of its core mission, making it harder for banks to serve customers, manage real risks and fuel economic growth.
BetterBankSupervision.com is your resource to understand how supervision works today and why it’s necessary to build a more rational and effective oversight framework.
5,000+
Estimated number of government examiners overseeing U.S. banks, with decisions largely shielded from public scrutiny.
45 Years
Age of the CAMELS rating system, which has never undergone formal review.
61%
The increase from 2016 to 2023 in employee hours dedicated to complying with financial regulations and examiner mandates (BPI Member Survey).
24%
The increase in bank capital caused by a one-point downgrade in CAMELS rating due to examiner discretion — not necessarily an increase in risk (NBER).
Regulators’ Role in Account Closures
Bank examiners have used the vague and amorphous concept of “reputational risk” to effectively push banks out of disfavored business lines. Regulators have made progress in addressing these challenges. The Office of the Comptroller of the Currency (March 2025) and Federal Reserve (June 2025) announced they would eliminate reputational risk as part of the bank examination process. The FDIC has also signaled that it plans to move forward with a rulemaking taking similar action (April 2025). However, more action is needed. Learn the truth about account closures and how to fix it.
Why Regulate Banks?
Banks accept deposits and, therefore, expose businesses and consumers to the risk of loss if a bank were to fail. They are also susceptible to bank runs in which a large number of depositors suddenly seek to withdraw funds because they fear the bank will soon fail. As a result, U.S. law creates a “regulatory framework” for banks that is intended to reduce or mitigate these risks. Those benefits include:
- Deposit insurance provided by the Federal Deposit Insurance Corporation.
- Access to emergency liquidity through the Federal Reserve’s discount window.
- Access to Federal Reserve “master accounts” in which to hold funds and facilitate payments.
Congress articulated a clear view that to enjoy these benefits, banks are expected to act prudently and comply with a meaningful regulatory and supervisory framework.
Three Functions of the Bank Regulatory Agencies:
The Role of Matters Requiring Attention
An MRA is a written communication from bank examiners to a bank’s management or board requiring a change in practice. It is typically conveyed in a formal examination report or supervisory letter.
An “MRIA,” or “Matter Requiring Immediate Attention,” is a variant of MRA unique to the Federal Reserve, and is self-evidently an MRA that is considered to be more urgent.
U.S. Financial Regulation: Key Players
A bank’s charter (i.e., how it is incorporated) affects the federal law that applies and what federal agencies are responsible for regulation. Banks may be chartered by either the federal government under federal banking law; or a state government under an individual state’s banking laws. U.S. law also distinguishes between different legal entities within a banking organization, with distinct rules and supervisors of:
- An actual bank – that is, a legal entity that is specially chartered as a bank and accepts deposits that are insured by the FDIC;
- The “bank holding company” – that is, any company that controls (directly or indirectly) a bank; and
- The “affiliates” of the bank – that is, any company that is under common control with the bank.
The key regulatory agencies that oversee banks include:
Federal Reserve
Primary federal regulator for bank holding companies and savings and loan holding companies. Also serves as a regulator of any foreign bank operating in the United States and for state member banks.
Federal Deposit Insurance Corporation (FDIC)
Insures the deposits of all federal and state banks and thrifts pursuant to federal law Maintains the Deposit Insurance Fund. Primary federal regulator for state non-member banks and state thrifts
Office of the Comptroller of the Currency (OCC)
Primary federal regulator for national banks and federal savings associations. Authority also extends to subsidiaries of national banks/Federal savings associations
State Regulators (e.g., NYDFS)
States have independent regulatory bodies responsible for chartering state banks, regulating insurance companies and licensing money transmission services business
Consumer Financial Protection Bureau (CFPB)
Responsible for enforcing federal consumer financial protection laws
Commodity Futures Trading Commission (CFTC)
Exclusive authority to regulate derivatives
Securities and Exchange Commission (SEC)
Regulates publicly traded companies and companies engaged in investment activities
Financial Crimes Enforcement Network (FinCEN)
Responsible for helping to identify and prevent money laundering and other illicit financial crime. A Bureau of the U.S. Department of Treasury
"Our guiding principles are rooted in President Trump’s focus on restoring common sense to government. First, regulation should derive from a clear statutory mandate. That includes safety and soundness, mitigating risk to financial stability, and consumer protection. Second, regulation should be efficient. That means regulations should strike an appropriate balance between costs and benefits.Third, regulation should be fair. That means the rules of the road should be clearly stated and consistently applied across entities and across time. Last, the regulators themselves should be efficient. Fulfilling their statutory mandates does not require ever-increasing budgets and employee counts."
Secretary Scott Bessent
U.S. Department of the Treasury
"Under the guise of reputation risk, anti-money laundering laws, or general concern about uncooperative bank management, bank regulators have the power to influence bank decisions for political reasons."
Julie Andersen Hill
University of Wyoming – College of Law
“Examiner discretion has a large and persistent causal impact on future bank capitalization and supply of credit, leading to volatility and uncertainty in bank outcomes, and a conservative anticipatory response by banks”
National Bureau of Economic Research Working Paper Series
Sumit Agarwal, Bernardo C. Morais, Amit Seru, Kelly Shue, Working Paper 32344: Noisy Experts? Discretion in Regulation (April 2024):
“We have clearly seen reputational risk being overused by bank supervisors, bank examiners saying, ‘well, maybe you want to move out of there,’ and it changes depending upon who’s in the White House. I don’t think that that’s right in either case. Banks should be able to figure out what they can do to drive value and serve their customers.”
Sen. Thom Tillis
(R-NC)
“They wanted to bank with us, and many of the other banks that we reached out to after that bank account was closed also wanted to work with us. This was consistent across the board — the banks did want to work with us and were not discriminating against us. But, they were worried about regulatory risk.”
Nathan McCauley
Anchorage Digital
The Ratings Systems: LFI vs. CAMELS
Bank examiners use two main rating systems to evaluate the health of banks and bank holding companies. For individual banks, they rely on the long-standing CAMELS system, which hasn’t seen major updates in decades. For larger bank holding companies, the Federal Reserve applies the Large Financial Institution rating framework. In practice, the overall ratings in both systems often hinge on highly subjective factors, most notably the “Management” score in CAMELS and the “Governance & Controls” score in LFI, where examiner judgment plays a central role.
The examination process and examination ratings – as well as informal enforcement actions – are secret.
- The agencies take the position that any exam-related information is government property and thus that its improper disclosure is a conversion of federal property, therefore a federal crime.
Large Financial Institution (LFI) Rating System
The Large Financial Institution Rating System was created in 2018 to assess the resilience of banks with over $100 billion in assets based on three components: (1) capital planning and positions; (2) liquidity risk management and positions; and (3) governance and controls. If any one of these components is rated unsatisfactory, the institution receives an overall unsatisfactory rating. As of November 2024, these institutions hold 85 percent of the assets supervised by the Federal Reserve, or $26 trillion out of a total $30.5 trillion.
The Fed publishes these ratings in its semiannual Supervision and Regulation Report. Regulators have repeatedly indicated that large financial institutions remain strong and resilient; however, the current scoring approach has identified two-thirds of those institutions as less-than-satisfactory, undermining the utility of the existing framework. Fortunately, the Federal Reserve is currently in the process of revising the LFI ratings framework.
CAMELS Rating System
The heart of the bank examination process is the CAMELS rating regime – the 45-year-old system for rating banks that has no statutory mandate and has never been meaningfully reviewed since its adoption. While the CAMELS system has six components, the federal banking agencies have made the “Management” component the deciding factor in determining its composite rating and whether a bank will be subject to secret sanctions.
- Capital: “The ability of management to address emerging needs for additional capital” and “Prospects and plans for growth, as well as past experience in managing growth.”
- Asset Quality: “The adequacy of loan and investment policies, procedures, and practices” and “The ability of management to properly administer its assets”
- Earnings: “The adequacy of the budgeting systems, forecasting processes, and management information systems in general.”
- Liquidity: “The capability of management to properly identify, measure, monitor, and control the institution’s liquidity position, including the effectiveness of funds management strategies, liquidity policies, management information systems, and contingency funding plans.”
- Sensitivity to Market Risk: “The ability of management to identify, measure, monitor, and control exposure to market risk given the institution’s size, complexity, and risk profile.”
In a study of the CAMELS regime, researchers define “absolute discretion” as “…the extent to which the examiner relies on case-specific soft information as well as any biases, gut feelings, or intuition.”[1] They define “directional discretion” as the extent to which an examiner is tighter or easier on average. In the case of the composite CAMELS rating, they “…find economically large levels of and variations in absolute discretion among examiners, as well as wide variation in directional discretion.”[2]
How Does Supervision Play Out in Practice?
Over 4,000 banks are operating in the United States, with over 5,000 bank examiners responsible for examining those institutions, depending on the type of charter and the riskiness of the institution. For large banks, examiners don’t just show up once a year. These examiners are embedded within individual banks, both on-site and off-site, requesting information and observing the activities of the bank for any activity that the examiner may find disagreeable.
Banks generally receive CAMELS or LFI ratings (depending on the size of the institution) every 12-18 months. During these reviews, examiners will meet with bank management, review quarterly call reporters, financial health metrics, and other resources to provide the bank a score based on the applicable rubric (e.g., CAMELS or LFI). These expectations are increasingly intrusive into every aspect of a bank’s business operations — for example, examiners insisting on certain IT vendors.
In between these scheduled cycles, examiners are constantly meeting with bank staff, soliciting data, participating in management meetings, and tracking outstanding issues (i.e., MRAs and MRIAs). When issues are identified, the examiner may issue additional MRAs or MRIAs that require corrective actions.
These activities — which are often subjective — and reports produced as a result are considered “confidential supervisory information.” Banks are legally prohibited from disclosing this information publicly, under threat of criminal sanction.
By law, all of the banking agencies must maintain processes by which banks can appeal material supervisory determinations. These vary by agency, but all involve a process by which any appeal is heard and decided internally, with only a modicum of legitimate due process.
The Problem with the Bank Supervision Framework
Bank supervision is trying to do too much in too many places, often without objective standards or oversight.
01
This modern supervisory regime operates in secret, with no meaningful checks and balances.
Examiners issue non-public directives — like Matters Requiring Attention — that function as de facto enforcement actions, carrying major consequences such as denied mergers, increased insurance costs, or limits on growth. These penalties often stem from subjective judgments, especially around the “Management” component of the CAMELS rating system, which can outweigh all objective financial metrics and trigger automatic restrictions.
02
Examiners focus on process and immaterial issues, and not on the real financial risks that are their statutory mandate.
Examiners are embedded within banks, sometimes permanently, and their role has expanded from monitoring financial soundness to micromanaging operations, including IT systems, vendor relationships, and even board governance. They now evaluate how banks run their businesses, often steering strategic decisions through informal pressure rather than legal process.
In effect, supervision has become a powerful, unaccountable system that shapes bank behavior far beyond what is contemplated in law— not through regulation, but through discretion.
Understanding supervision today means recognizing not just its intended role, but also how far it has drifted into directing banks’ business.
03
The examination process is used to push banks out of legitimate activity that benefits economic growth.
- The primary occasion where such practices became public was Operation Choke Point, when it was revealed by Congressional investigations and media reports that examiners were pushing banks out of lending to politically unpopular businesses.
- More recent reports illustrate how “reputational risk” was used to mandate debanking of disfavored businesses or the people who worked for them. While the law generally does not require preapproval for new banking products or services, the agencies effectively banned banks from opening accounts for crypto companies without individual examiner approval, requiring banks to seek “supervisory non-objection” for these activities.
- Through their AML examinations, the agencies can designate certain industries or companies as “high risk,” a designation that comes with so high a compliance burden as to force the bank to expel the customers from the bank. This includes disfavored industries and the people who work in them.
- More recently, the shift of lending to private credit followed agency “guidance” mandating that banks strictly limit lending to leveraged, mid-sized companies. Even when this guidance was found to be illegal under the Congressional Review Act, the agencies continued to enforce it.
- Through pressure exerted through the examination process, regulators have pushed banks out of the mortgage servicing business, leveraged lending and synthetic risk transfers, which enable banks to expand lending to households via mortgages, auto loans, commercial and industrial (middle-market loans) and commercial real estate loans. Lifting those and any future restrictions would power economic growth.
- Examiners have directed regional banks that are in full compliance with all liquidity rules to restrict lending and hold more government securities; they have directed regional banks that are in full compliance with all capital rules to raise capital.
04
Duplicative and conflicting regulatory mandates makes it harder for banks to support the economy.
Between the OCC, Federal Reserve, FDIC and other agencies, this alphabet soup of regulation leads to redundancy, inefficiency and mission creep. Regulatory complexity is making it harder for banks to do what matters most: supporting economic growth and expanding access to credit.
Click on a regulatory agency below to see which financial activities they oversee.
01
This modern supervisory regime operates in secret, with no meaningful checks and balances.
Examiners issue non-public directives — like Matters Requiring Attention — that function as de facto enforcement actions, carrying major consequences such as denied mergers, increased insurance costs, or limits on growth. These penalties often stem from subjective judgments, especially around the “Management” component of the CAMELS rating system, which can outweigh all objective financial metrics and trigger automatic restrictions.
02
Examiners focus on process and immaterial issues, and not on the real financial risks that are their statutory mandate.
Examiners are embedded within banks, sometimes permanently, and their role has expanded from monitoring financial soundness to micromanaging operations, including IT systems, vendor relationships, and even board governance. They now evaluate how banks run their businesses, often steering strategic decisions through informal pressure rather than legal process.
In effect, supervision has become a powerful, unaccountable system that shapes bank behavior far beyond what is contemplated in law— not through regulation, but through discretion.
Understanding supervision today means recognizing not just its intended role, but also how far it has drifted into directing banks’ business.
03
The examination process is used to push banks out of legitimate activity that benefits economic growth.
- The primary occasion where such practices became public was Operation Choke Point, when it was revealed by Congressional investigations and media reports that examiners were pushing banks out of lending to politically unpopular businesses.
- More recent reports illustrate how “reputational risk” was used to mandate debanking of disfavored businesses or the people who worked for them. While the law generally does not require preapproval for new banking products or services, the agencies effectively banned banks from opening accounts for crypto companies without individual examiner approval, requiring banks to seek “supervisory non-objection” for these activities.
- Through their AML examinations, the agencies can designate certain industries or companies as “high risk,” a designation that comes with so high a compliance burden as to force the bank to expel the customers from the bank. This includes disfavored industries and the people who work in them.
- More recently, the shift of lending to private credit followed agency “guidance” mandating that banks strictly limit lending to leveraged, mid-sized companies. Even when this guidance was found to be illegal under the Congressional Review Act, the agencies continued to enforce it.
- Through pressure exerted through the examination process, regulators have pushed banks out of the mortgage servicing business, leveraged lending and synthetic risk transfers, which enable banks to expand lending to households via mortgages, auto loans, commercial and industrial (middle-market loans) and commercial real estate loans. Lifting those and any future restrictions would power economic growth.
- Examiners have directed regional banks that are in full compliance with all liquidity rules to restrict lending and hold more government securities; they have directed regional banks that are in full compliance with all capital rules to raise capital.
04
Duplicative and conflicting regulatory mandates makes it harder for banks to support the economy.
Between the OCC, Federal Reserve, FDIC and other agencies, this alphabet soup of regulation leads to redundancy, inefficiency and mission creep. Regulatory complexity is making it harder for banks to do what matters most: supporting economic growth and expanding access to credit.
Click on a regulatory agency below to see which financial activities they oversee.
Policy Solutions
The White House, Congress and regulators have already taken important steps to address regulatory and supervisory overreach, but there is more to be done. Our goal isn’t less supervision. It’s better supervision, focused where it counts most: on the actual financial health and resilience of our banks.
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Refocus bank exams on what matters: material risks that reflect a bank’s financial condition and objective standards.
Bank exams should focus on material financial risks (things like whether a bank has enough capital and liquidity to operate safely) rather than vague or subjective concerns. -
Modernize anti-money laundering rules to address bank account access concerns driven by regulatory and supervisory overreach.
Banks want to keep customers. Regulatory pressures are forcing banks to choose between serving customers and satisfying regulators. Banking agencies and FinCEN should revisit the BSA/AML framework and the 2024 proposal to implement the Anti-Money Laundering Act of 2020.
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Define “unsafe and unsound” practices by rulemaking.
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Repeal illegal guidance.
Repeal unlawful or improperly issued guidance (e.g., leveraged lending, venture capital, model risk) and clarify that agency policy decisions should be adopted through proper process mandated by law, not by non-public supervisory directives. -
Restore fairness, efficiency and coordination.
Eliminate duplicative examinations across multiple agencies, including consumer exams.