This article is Part Two of our series highlighting new leadership at the Federal Reserve, signaling a meaningful shift in the Fed’s approach to banking regulation. Read Part One here.
On July 10, 2025, the Federal Reserve unveiled a targeted proposal to recalibrate its supervisory rating framework for large bank holding companies, specifically revising the criteria for the coveted “well‑managed” status. This change marks the latest in a broader regulatory agenda outlined by Vice Chair for Supervision Michelle Bowman, who has emphasized a more tailored, risk‑focused approach to bank oversight.
Context and Rationale
Since its introduction in 2018, the Fed’s supervisory rating system has evaluated large banks based on three categories—capital, liquidity and governance & controls—with each category assigned one of four ratings: broadly meets expectations, conditionally meets expectations, deficient‑1, or deficient‑2. Under the current framework, any single deficient‑1 rating automatically disqualifies a bank from “well‑managed” status, triggering restrictions such as limitations on acquisitions—even if the institution exhibits strong capital and liquidity.
Industry complaints—particularly around the subjective nature of governance assessments—have mounted over time, prompting calls for greater transparency and predictability in the Fed’s evaluations. Under the new draft, a bank may still retain “well‑managed” status with up to one deficient‑1 rating, provided it has no deficiencies in multiple categories or a deficient‑2 rating. Thus, only a serious deficiency in two areas or a single deficient‑2 would remove the status.
Key Proposed Changes
The Board’s proposal, formally released at 2:15 p.m. EDT on July 10, invites public comment for 30 days via the Federal Register. The changes include:
- Allowing up to one deficient‑1 rating without disqualifying a firm from “well‑managed” status.
- Maintaining exclusion from “well‑managed” status for any bank with a deficient‑2 rating in any category.
- Extending parallel revisions to insurance firms regulated by the Fed.
- Exploring future enhancements such as an overall composite rating, rather than relying solely on component‑based grades.
Fed officials estimate that about two‑thirds of banks with over $100 billion in assets currently lack “well‑managed” status—many despite healthy capital and liquidity positions. Under the proposal, eight firms would immediately qualify for improved ratings.
Bowman’s Perspective
Michelle Bowman has been an outspoken proponent of this shift. In a statement accompanying the proposal she noted, “By addressing this mismatch between ratings and overall firm condition, the proposal adopts a pragmatic approach to determining whether a firm is well managed.” She further emphasized the importance of aligning supervisory judgments with the material financial risks actually faced by banks: “It is our responsibility to ensure that supervisory ratings are current, credible, and accurately reflect material financial risks. We have observed instances where the supervisory process … could be improved to better reflect a firm’s condition.”
Her broader vision for regulatory reform relies on risk‑based, tailored supervision—steering away from rigid, subjective assessments. At her first public remarks as Vice Chair for Supervision in June, she stated: “Our goal should not be to prevent banks from failing or even eliminate the risk that they will. Our goal should be to make banks safe to fail, meaning that they can be allowed to fail without threatening to destabilize the rest of the banking system.” Bowman also warned that creeping overemphasis on procedural issues detracts from identifying and addressing core financial risks: “While judgment is a legitimate and necessary tool in supervision, it must always be grounded in the materiality of the identified issues … as they relate to the financial health of each institution and the banking system as a whole.”
Support and Dissent
Supporters—including analysts at TD Cowen—see the move as unlocking growth for larger banks restricted from mergers or charter applications. As one TD Cowen analyst noted, “That should open the door to more regional bank M&A as about two‑thirds of bigger banks could not do deals because of how the holding company rating was calculated.”
However, Fed Governor Michael Barr, Bowman’s predecessor, openly dissented. He warned: “If we permit firms that have significant management weaknesses to acquire other firms, it would increase the likelihood and cost of their failure.” Governor Adriana Kugler also raised concerns that the proposal might swing the pendulum too far in the opposite direction by weakening oversight and diluting incentives for governance improvements.
Potential Impacts
Regulatory Flexibility: Banks with minor governance shortcomings yet solid capital and liquidity would regain “well‑managed” status, enabling smoother access to acquisition processes and expansion.
Strategic Risk-Taking: Proponents argue that firms may feel more empowered to pursue low‑risk, growth‑oriented activities without fear that minor grading issues would penalize their status.
Systemic Risk Concerns: Critics caution that loosening the rating standard could:
- Diminish incentives for improving governance controls;
- Allow firms with unresolved internal weaknesses to undertake mergers;
- Undermine public trust and borrower discipline if oversight appears too lax.
The Fed’s public comment period will be a test — balancing the appeal of increased operational flexibility against the need to preserve the integrity of supervision.
Broader Regulatory Agenda
This proposal is part of a sweeping reform agenda advanced by Bowman over the past months. Other measures include:
- Recalibrating the enhanced supplementary leverage ratio (eSLR) to reduce capital charges that penalize low‑risk Treasury holdings—a revision Bowman touted as necessary to maintain healthy U.S. Treasury market intermediation while addressing unintended regulatory constraints.
- Overhauling stress testing transparency and the design of global capital surcharges to ensure that capital requirements provide resilience without impeding lending and economic growth.
- Developing a separate supervisory framework for smaller, simpler banks, so they are not subjected to rules designed for large, complex institutions.
Bowman’s stated objective is clear: tailor regulation to real, material risk and align supervisory tools with banks’ actual financial condition.
Conclusion
The July 10 proposal—by allowing limited deficiencies without stripping “well‑managed” status—reflects a strategic pivot at the Fed toward more pragmatic oversight. Michelle Bowman frames it as correcting an institutional misalignment: the current system penalizes well‑capitalized banks too harshly for minor governance issues. Yet, dissent persists, warning the changes could lower the bar for management quality and invite systemic vulnerabilities. Over the coming weeks, public commentary and industry feedback will help determine whether the Fed strikes the right balance between flexibility and robustness.
Bowman’s broader agenda suggests further rule refinements are likely, all centered on tailoring supervisory expectations and reducing unnecessary burdens, particularly for institutions that demonstrate financial strength and resilience. As Bowman herself observes: “We have observed instances where the supervisory process … could be improved to better reflect a firm’s condition.”
