Advocates for recent changes to bank regulation and supervision have characterized these efforts as merely an attempt to restore balance and to prioritize substance over form. More neutral observers also accept much of this premise. But is this really the case? Or are terms like reform, modernization, and material financial risks masking how extreme some recent and proposed changes really are? In other words, is framing the issue this way sanewashing regulatory reform?
About Sanewashing
The Poynter Institute describes sanewashing as “the act of packaging radical and outrageous statements in a way that makes them seem normal.” The term gained currency when describing the “defund the police” movement. The sanewashed version would describe it as not actual defunding but more moderate efforts to lighten the burden of police departments.
But some spoil this narrative. In a 2020, Mariame Kaba, an anti-incarceration activist, wrote a New York Times op-ed entitled, “Yes, We Mean Literally Abolish the Police.” Whether Ms. Kaba spoke for anyone other than herself is questionable, but her writings undermined attempts to sanewash the movement.
Extreme or incoherent statements by Donald Trump have also been sanewashed. A 2024 Associated Press headline described a rambling response Trump made about childcare as, “Trump suggests tariffs can help solve rising child care costs in a major economic speech.” The 19th provided Trump’s remarks verbatim, where their incoherence (including the statement that “childcare is childcare”) became more readily apparent.
Sanewashing and Bank Regulation
Banking regulation and supervision present a conducive environment for sanewashing. Bank supervision goes on under a cloak of confidentiality that limits the amount of information available in the public domain. That can give rise to what I described in an earlier post as an unreliable narrator problem. Over the past few years, interested parties have painted a picture of out-of-control examiners micromanaging and downgrading well-run banks. That allows recent changes to be characterized as a return to normalcy. This narrative is mostly nonsense but can be hard to refute given confidentiality rules.
When looking at sanewashing, there are some important distinctions between agencies. Russell Vought, Acting Director of the Consumer Financial Protection Board (CFPB), accompanies extreme policies with extreme rhetoric. The CFPB has recently instituted a “humility pledge” that examiners are supposed to recite at the start of each exam. The accompanying press release describes “the thuggery pervasive in prior leadership.” It also goes full black helicopter by invoking George Soros in the opening paragraph.
I worked in bank supervision under seven presidents and never saw examiner instructions this weird or creepy. Yet there were attempts to sanewash Vought’s remarks. JD Supra presented a sanewashed summary that indicated that “The Bureau stated the pledge will be intended to promote greater transparency, professionalism and efficiency in supervisory exams, and will mark a shift away from prior practices.” Well, at least they linked the pledge and the announcement for the benefit of more conscientious readers. One prominent law firm described the pledge and other policy changes as “certainly welcome news to any financial institution that has been subject to CFPB examinations.”
Safety and soundness regulators have taken a decidedly different approach, in style if not in substance. They have avoided some of the inflammatory language coming out of the CFPB. Instead, they relied on comforting if largely meaningless buzzwords like “reform,” “modernization,” and “material financial risk.” The substance of recently enacted and proposed changes is quite another matter, however.
Qualitative vs. Quantitative
There has been a long-running debate among supervisors about how much weight to place on qualitative versus quantitative factors. Historically, they consider both processes and results but may emphasize one more than the other. Recent changes to supervision have also been described in those terms. The National Law Review indicated that the proposals were designed to “refocus bank supervision on material financial risks.” The article went on to describe the proposals as “a significant federal shift toward risk-based, objective supervision.”
Even the robots are buying into the sanewashed version of regulatory reform. I asked both Google’s AI Mode and ChatGPT whether “the OCC and FDIC are advancing regulatory reform.” Both answered with a resounding and uncritical “yes.” Google stated that “yes, the OCC and FDIC are actively advancing significant regulatory reforms, primarily focused on refocusing supervision on core financial risks, streamlining processes and reducing burdens.” ChatGPT has a similar take but also emphasizes the supposed moderation of recent changes. “The OCC is pushing pragmatic reform aimed at modernization, clearer guidance, and proportional supervision — not wholesale rollback.” Neither Google nor ChatGPT use qualifiers like “the agencies claim.” If AI is to replace bank examiners, it will need to develop better BS detectors.
In fact, however, recent actions have gone well beyond reform and refocus. As I noted in an earlier post, the OCC and FDIC want to raise the threshold for “unsafe and unsound practices” to those that are likely to result in material harm to the bank. The proposal goes even further by applying essentially the same standards to informal actions like matters requiring attention (MRAs) and ratings downgrades to less than satisfactory (a CAMELS rating of 3 on a 5-point scale). The Federal Reserve did not join in the proposal, but Fed Vice Chair for Supervision Michelle Bowman has indicated her concurrence. The proposal defined neither “likely” nor “material” but invited comment.
The proposal received 30 public comments, including one from the Bank Policy Institute (BPI). The BPI, the lobbying arm for the largest U.S. banks, has been extremely influential player in the policy debate. Speeches by Bowman, Comptroller of the Currency Jonathan Gould, and FDIC Chair Terrence Hill have echoed BPI’s talking points to a remarkable degree.
BPI is the Mariame Kaba of regulatory reform. The BPI letter indicated that “likely” should mean that the bank “has suffered or probably will suffer” a financial loss.” Moreover, “examiners must establish by demonstrable and quantifiable evidence or analysis that such practice, if continued, would materially harm the financial condition of the institution.” Furthermore “the burden of producing this evidence falls solely on examiners and does not impose any requirement that institutions prepare this evidence or analysis.” (Empasis added.)
How large does the loss have to be to be deemed material? The BPI claims it should involve practices that cause financial harm “sufficient to call into question the ability of the bank to continue to conduct its business.” Such a definition would preclude even mild supervisory actions until the bank is on the brink of failure.
Of course, OCC and FDIC may decide that the BPI approach goes too far. A more probable scenario would be to keep the definitions of “likely” and “material financial harm” vague. That will provide senior regulators with some plausible deniability should things go wrong.
Where are the Offsetting Actions?
Regulators are also pushing for changes to MRA remediation and living wills that prioritize trust over verification. OCC has proposed raising its threshold for Heightened Standards from $50 billion to $700 billion. Staffing levels have decreased by more than 30% at the OCC with the FDIC and Fed following suit. Are regulators also taking actions that emphasize core financial risks? Well, such actions aren’t readily apparent. Senior regulators have relied on vague buzzwords while largely skipping the details. Michelle Bowman gave a speech to the California Bankers Association that used the term “material financial risks” eight times without ever bothering to define the term.
As shown in the chart below, both qualitative and quantitative initiatives have made bank supervision more permissive. Stress tests and horizontal reviews include both financial and process elements and regulators are easing up on both. Despite the supposed emphasis on core financial risks, regulators are allowing more leverage at financial institutions and (SLR, CBLR, risk weighting). they have also allowed more risk-taking by withdrawing previous guidance on higher risk loans (leverage lending). Regulators have also eased standards for new bank charters, though such banks fail at twice the rate of other banks.
Reform and Modernization
The American Heritage Dictionary defines “reform” as “a change for the better, improvement.” It’s unclear how unlearning the lessons from the past 40 years represents an improvement. Moreover, proposed changes aren’t merely a return pre-2008 supervision. Hurdles for taking supervisory actions would be higher than those in the 2000s or even those in the 1980s. That suggests that “modernization” means a return to the Roaring Twenties, or perhaps the Gilded Age.
Is this just Laissez-Faire?
Are current regulators merely adopting a laissez-faire approach that allows the market in general and individual banks in particular to determine their best interests? Banking in the United States seems particularly ill-suited for laissez-faire considering the key role played by the federal government. Government entities insure deposits, often at levels well above stated limits, and provide emergency liquidity at below market terms. The combination of deregulation and government support provides a classic case of moral hazard. Still, there are plenty of true believers that accept the invisible hand always and everywhere as an article of faith.
But banking regulators have also taken actions that are anything but laissez-faire. Not content to eliminate considerations of reputation risk in supervisory reviews, regulators are also criticizing banks for taking their own reputations into consideration in their own decisions. In its Preliminary Review of Large Bank Debanking Activities, OCC looked at activities at ten large banks. OCC complained that one large bank established a policy that “imposed restrictions on certain industry sectors because they engaged in ‘activities that, while not illegal, are contrary to [the bank’s] values.’” Apparently, this bank was not sufficiently amoral for the OCC’s taste.
This review was part of an effort by the OCC “to eliminate politicized or unlawful debanking in the federal banking system.” It’s telling, however, that the critique focused on supposed debanking of Republican-aligned sectors, including oil and gas exploration, coal mining, firearms, private prisons, payday lending, tobacco, and digital assets.
The OCC’s latest Semiannual Risk Perspective was even more telling. The focus was not on core financial risks, like credit risk, liquidity risk, or interest rate risk. Rather, it was on “innovation,” with the OCC declaring that, “A lack of investment in new technologies, products, and services may present material risks to long-term bank performance and viability of institutions.” This characterization seems at odds with OCC’s notion that supervisory actions should be limited to practices that present likely, proximate, and material risk of financial harm. Few if any banks failed merely due to a failure to innovate, though the list of failed “innovators” is a long one: Countrywide, IndyMac, NetBank, SVB, and Signature.
The emphasis on innovation largely focuses on bright shiny objects like crypto, rather than improving a bank’s systems and risk infrastructure. In fact, OCC appears to be deemphasizing the latter. In 2024, OCC added a provision to an enforcement action against Citibank that required the bank to prioritize investments in risk infrastructure. An $81 trillion in “near miss” in 2025 seemed to reinforce these concerns. Yet OCC terminated this provision by year-end 2025. The crypto industry’s spending on the 2024 campaign couldn’t have played a role in efforts to promote (crypto-friendly) “innovation.” Could it?