"Legal ambiguity" becomes the focus of the game! Wall Street giants lobby the Federal Reserve, seeking to ensure permanently relaxed regulation

According to reports, major Wall Street banks are privately lobbying the Federal Reserve, urging it to ensure that upcoming banking regulatory reforms cannot be easily overturned by future administrations when designing new regulatory frameworks.According to sources familiar with the matter, these banks are especially asking the Federal Reserve to formally address a legal ambiguity regarding the legal status of the more relaxed supervisory process proposed to replace "Matters Requiring Attention" (MRA). This would provide banks with a more solid legal basis in the long run. Sources indicated that the Federal Reserve plans to issue clearer guidance on this matter.

Currently, Federal Reserve Vice Chair for Supervision, Michelle Bowman, is leading a major overhaul of the Fed’s bank supervision rules. She believes that the current supervisory process has placed an excessive burden on banks, weakening their ability to provide loans to businesses and individuals. Critics argue that the strict regulatory rules implemented after the 2008 financial crisis have led banks to abandon certain types of financing, leaving non-bank financial institutions who are not subject to the same regulations to fill this gap.

According to new proposed supervisory rules, the Federal Reserve would significantly reduce the use of MRAs. For years, MRAs have been the primary tool for bank examiners to force lenders to fix deficiencies in risk management and internal controls. Bowman stated that many MRAs actually focus on minor errors and do not directly involve operational risks.

In October last year, the Federal Reserve announced that going forward, MRA would only be used in cases involving significant financial risks, while other issues would be handled through “observations” as informal guidance. The “observations” mechanism was in fact used by supervisory agencies before 2013.

However, under the new supervisory framework, the use of “observations” presents legal ambiguity, as it is not clearly defined how regulators will respond if banks fail to take action. According to the report, banks are concerned that a future Federal Reserve leadership, possibly dominated by Democratic officials, might exploit this ambiguity to escalate “observations” to MRAs if issues remain uncorrected.