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Nutter Bank Report: February 2025
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- Executive Order Signals Potential Restructuring of Federal Banking Agencies
- Federal Reserve Governor Outlines Possible Direction of Bank Regulatory Reforms
- FDIC Reconsidering Supervisory Approach to Crypto-Related Activities
- GAO Urges Federal Financial Regulators to Finalize Rules on Incentive Compensation
- Other Developments: Know Your Customer and Generative AI
1. Executive Order Signals Potential Restructuring of Federal Banking Agencies
Amid media reports that the administration may be considering a plan to consolidate the FDIC, the supervisory functions of the Federal Reserve, and the OCC into a single agency, President Trump issued an executive order purporting to limit the discretion of independent federal agencies, which would include the federal banking agencies. According to a fact sheet accompanying Executive Order 14215, released on February 18, all independent federal agencies are required to “submit draft regulations for White House review” (other than those related to monetary policy functions of the Federal Reserve) and “consult with the White House on their priorities and strategic plans.” Under the executive order, independent federal agencies are required to abide by interpretations of the law made by the White House and the U.S. Attorney General. The executive order also asserts White House authority over independent agency enforcement actions, including those based on regulations and published supervisory guidance. Click for a copy of Executive Order 14215.
Nutter Notes: Executive Order 14217, issued on February 19, takes additional steps to rein in federal agencies by disbanding a number of governmental entities, including three bank and credit union advisory groups (the Community Bank Advisory Council, the Academic Research Council, and the Credit Union Advisory Council). A fact sheet accompanying the executive order explains that its purpose is “to further decrease the size of the [f]ederal [g]overnment to enhance accountability, reduce waste, and promote innovation.” The executive order directs the three White House advisors to submit to the President a list of additional “unnecessary governmental entities and Federal Advisory Committees that should be terminated on grounds that they are unnecessary” within 30 days of the order. The scope and impact of the two executive orders remain unclear. Since a 1935 Supreme Court decision upheld the constitutionality of the Federal Trade Commission Act’s limitations on the authority of the President to remove a commissioner of the FTC, subsequent legal challenges have tended to result in court decisions favoring agency independence. Click for a copy of Executive Order 14217.
2. Federal Reserve Governor Outlines Possible Direction of Bank Regulatory Reforms
Governor Michelle Bowman outlined possible regulatory reforms in the areas of safety and soundness supervision, regulatory applications, and rulemaking in recent public remarks. Governor Bowman indicated in a speech to the American Bankers Association 2025 Conference for Community Bankers on February 17 that the current regulatory framework could be tailored more effectively to the size, risk, complexity, and business model of banks. Addressing the current bank ratings framework, she questioned whether “core financial risks have been de-prioritized, and non-core and non-financial risks—things like IT, operational risk, management, risk management, internal controls, and governance—have been over-emphasized.” In the area of regulatory applications, she suggested a review of application forms to determine whether they gather the information needed to act on an application without resorting to an onerous and time-consuming process of responding to requests for additional information. Governor Bowman also suggested that it is time to reevaluate the regulations that implemented the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Click for a copy of Governor Bowman's remarks.
Nutter Notes: Governor Bowman touched on similar themes in a speech before the Kansas Bankers Association Government Relations Conference on February 5. Specifically, she said that the current bank regulatory framework could more effectively balance the need to promote safety and soundness with the costs of regulatory compliance. She suggested that various regulatory requirements could be tailored more efficiently to banks based on their relative size. As an example, she maintained that applying “the same regulatory requirements on banks with assets of $2 billion to $2 trillion under the new rules implementing the Community Reinvestment Act demonstrated a missed opportunity to promote greater effectiveness and efficiency.” Governor Bowman suggested that published supervisory guidance offers opportunities to take a more tailored approach by distinguishing supervisory expectations among institutions of differing sizes and risk profiles. Click for a copy of Governor Bowman's remarks.
3. FDIC Reconsidering Supervisory Approach to Crypto-Related Activities
The FDIC has publicly released 175 documents related to its supervision of banks that engaged in, or sought to engage in, activities involving or related to crypto assets (also referred to as “digital assets”). In a statement accompanying the February 5 release, Acting Chairman Travis Hill explained that the FDIC is “actively reevaluating [its] supervisory approach to crypto-related activities.” The documents include copies of correspondence with banks that received “pause letters” related to their crypto-related activities, as described in a 2023 FDIC Office of Inspector General report that criticized the FDIC’s lack of guidance to banks about risk management of crypto activities. That report recommended that the FDIC establish a plan for assessing risks pertaining to crypto-related activities within a specified timeframe, and that the FDIC “update and clarify the supervisory feedback process related to its review of supervised institutions’ crypto-related activities.” The recommendations have not been implemented. Acting Chairman Hill indicated that, among other things, the FDIC will consider replacing Financial Institution Letter 16-2022, which requires that banks notify the FDIC if they intend to engage in, or are already engaged in, crypto-related activities. Click for a copy of the FDIC documents related to supervision of crypto-related activities.
Nutter Notes: A number of Congressional committees in both the House of Representatives and the Senate have held recent hearings addressing whether depository institutions have engaged in discriminatory de-banking. For example, the Senate Banking, Housing, and Urban Affairs Committee held a hearing on February 5 that examined whether depository institutions may be refusing to lend or provide other banking services to businesses in a number of market sectors, including digital assets. The next week, during his semiannual testimony before the committee, Federal Reserve Chair Jerome Powell said that it would be “fair to take a fresh look frankly on de-banking,” and that, while the Federal Reserve does not intentionally require institutions to de-bank certain customers or industries, sometimes regulations may unintentionally lead to it and it should be addressed.
4. GAO Urges Federal Financial Regulators to Finalize Rules on Incentive Compensation
The U.S. Government Accountability Office (“GAO”) has published a report, entitled Agencies Should Finalize Rulemaking on Incentive Compensation, that includes a recommendation for six federal financial regulatory agencies (the Federal Reserve, the FDIC, the OCC, the NCUA, the FHFA, and the SEC) to issue a final rule on incentive compensation as prescribed in 2010 by Congress in the Dodd-Frank Act. In the report published on February 20, the GAO highlighted that roughly $130 million in bonuses were awarded between 2021 and 2023 at the three major banks that failed in March 2023 and emphasized that Congress has identified concerns about how banks balance incentive compensation practices that incentivize strong performances but that can also increase appetites for risky behavior. As part of the report, the GAO noted that the federal banking agencies have identified executive compensation concerns recently, including issuing a matter requiring attention (“MRA”) on incentive compensation at eight out of 15 large banks that GAO reviewed. On December 4 and 5, 2024, all six agencies agreed with the report’s recommendation to issue regulations or guidelines on incentive compensation “as soon as practicable” as required under the Dodd-Frank Act. Click for a copy of the GAO Report.
Nutter Notes: The GAO report makes clear that final rulemaking on incentive compensation is long overdue. However, action responding to the report is not expected in the near future given challenges in reaching a consensus to date, the fact that the recommendations were agreed to by the agencies under the prior administration, and the current requirement for executive branch agencies to pre-clear all proposed regulations with the White House under Executive Order 14215. There is also no indication that incentive compensation will be a focus of the new administration’s rulemaking agenda.
5. Other Developments: Know Your Customer and Generative AI
- FDIC Acting Chairman Urges More Flexible Customer Identification Program Requirements
Acting Chairman Hill in a February 7 letter to the Financial Crimes Enforcement Network (FinCEN) expressed support for enhancing flexibility with respect to customer identification program requirements. Specifically, Acting Chairman Hill expressed support for allowing banks to collect the last four digits of a Social Security Number from a customer, rather than the full nine digits. Click for a copy of the letter.
Nutter Notes: In his letter, Acting Chairman Hill noted that nonbank financial technology companies are permitted in many cases to onboard customers using the last four digits of a Social Security Number.
- Federal Reserve Vice Chair Comments on Risks Posed by Generative AI
Federal Reserve Vice Chair for Supervision Michael Barr discussed a possible framework for managing risks to the banking sector posed by generative artificial intelligence (“GenAI”) in his February 18 remarks to the Council on Foreign Relations. In his remarks, Vice Chair Barr suggested considering risks related to GenAI under two scenarios: in which GenAI is incrementally adopted primarily to augment what humans do today, and another involving more transformative change. Click for a copy of Vice Chair Barr's remarks.
Nutter Notes: Vice Chair Barr recommended that banks and the Federal Reserve System should consider investing resources necessary to understand GenAI technology, incorporate it into their workflows where appropriate, and train staff on how to use the technology responsibly and effectively.
Nutter Bank Report
Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, after interviewing our clients and our peers in the profession, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. Visit the U.S. rankings at Chambers.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Heather F. Merton. The information in this publication is not legal advice. For further information, contact:
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Michael K. Krebs Tel: (617) 439-2288 |
Matthew D. Hanaghan Tel: (617) 439-2583 |
Daniel W. Hartman |
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Kate Henry Tel: (617) 439-2304 |
Timothy J. Rennie Tel: (617) 439-2141 |
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