Banks Get a Pass: Fed Proposes Looser Leash for Wall Street’s Giants

What Happened

The Federal Reserve has proposed a major change in how it evaluates and supervises large banks. The aim is to make it easier for them to maintain top regulatory ratings even if they have internal flaws.

Under the current system, if a big bank shows just one weakness in areas such as governance, risk controls, or liquidity then it can be labeled as ‘not well managed.’That label can block the bank from mergers, acquisitions, and launching new activities.

The Fed wants to change that. Under the new proposal, a bank would only lose its top rating if it shows multiple issues or a single serious deficiency.
In practice, this would lift the regulatory leash from most of the country’s largest financial institutions.

Supporters, including Fed Vice Chair Michelle Bowman, argue that the current system is overly rigid. They say it doesn’t reflect a bank’s true financial health.
Bowman believes strong capital and liquidity should count for more. One-off flaws –especially in subjective areas like management or internal controls – shouldn’t hold a bank back.

But critics like Fed Governor Michael Barr disagree. He warns that the changes would let poorly governed banks grow unchecked. That, he says, creates long-term systemic risk.

Right now, two-thirds of large banks supervised by the Fed carry a “not well managed” tag. Most of those ratings stem from governance issues.
If the rule changes go through, many of those banks would become eligible for expansion, regardless of whether their risk management has actually improved.

Why It Matters

This change reflects a shift in how regulators view risk. Since the 2008 financial crisis, banks have operated under strict oversight with low tolerance for governance failures.
The goal was to prevent another collapse caused by opaque decision-making and unchecked expansion.

This proposal marks a step back from that approach. It favors business flexibility over tight control. For the banks themselves, it’s a major win. They get more freedom to grow, strike deals, and launch new products without waiting for a perfect report card from the Fed.

But for the financial system at large and everyone who depends on it, the tradeoff could be dangerous. The proposal creates space for banks to ignore red flags, as long as their balance sheets look good on paper. That’s exactly the kind of thinking that helped fuel past financial bubbles.

It also weakens the Fed’s leverage. Regulators would no longer have the power to hold banks accountable for mismanagement until multiple problems pile up.
This could delay intervention until it’s too late. If things go south, it won’t be the banks who pay first. It will be the consumers, workers, and taxpayers.

How It Affects Readers

For most Americans, these kinds of policy changes usually fly under the radar. But the long-term effects can be consequential.

A looser supervisory regime makes it easier for big banks to grow fast and cut corners. That can lead to riskier lending, aggressive acquisitions, and fewer safeguards, all of which can backfire during a downturn.

If a poorly governed bank expands too fast and stumbles, the fallout could hit the economy hard. That might mean tighter credit, job losses, and threats to savings or retirement accounts.

It also raises the chance that taxpayers could be asked to step in again if a major institution fails.

Even if you never set foot in one of these banks, the rules that shape them still affect you.
They influence your mortgage rate, your access to credit, and the overall stability of the economy around you.