Graeme Sloan/Bloomberg- Key insight: Changes to the Fed's supervisory framework are resulting in more banks being considered well-managed and, therefore, eligible for expansionary activities.
- Expert quote: "Though regulatory data shows limited delinquencies in this category, several high-profile [nonbank] defaults have led to concern about the private credit sector. Supervisory work shows that some banks are revisiting collateral management practices for these exposures." — Federal Reserve Supervision and Regulation Report.
- Forward look: The supervision report flagged several areas of emerging risks, including the rapid expansion of lending to nonbank financial institutions.
Supervisory ratings for large banks climbed as a result of the Federal Reserve's new oversight framework.
Roughly 80% of large financial institutions — those with more than $100 billion of assets — were deemed well-managed, according to the Fed's latest
The rapid improvement tracks the implementation of a new Fed policy that
Before the policy went into effect last year, the Fed considered less than half of large financial institutions well-managed, according to last year's supervision and regulation report. That figure was revised up in this year's report to reflect the framework change.
The share of large banks deemed well-managed had been below 50% since 2021, according to past Fed reports, falling to roughly one-third in 2023. Yet, this deterioration in ratings came as overall capital and liquidity levels in the banking system remained above statutory minimums — a point of frustration for banks and some policymakers. The absence of a well-managed rating could block a bank from engaging in mergers and acquisitions or adding new branches.
Fed Vice Chair for Supervision Michelle Bowman
"The odd mismatch between financial condition and overall supervisory condition as assessed by the prudential regulators raises a more significant issue, whether subjective examiner judgment — those evaluations based on subjective, examiner-driven, non-financial concerns — is driving the firm's overall rating," Bowman said in a February 2025 speech. "Are ratings trends based on the materiality of the identified issues, or do they imply that the regulators see widespread fragility in the banking system?"
As
The change in overall ratings was not the only policy change to manifest in the Fed's latest supervision and regulation report. The semiannual document noted that Fed supervisors closed or downgraded "a number of" enforcement directives — known as matters requiring attention or, in more serious cases, matters requiring immediate attention — to align with changes to the Fed's new Statement of Supervisory Operating Principles, which was issued last fall.
The new statement directs examiners to focus more on direct threats to safety and soundness and less on "procedural or documentation shortcomings." Because the official policy change was adopted late in the year, it is unclear how much it impacted the volume of MRAs and MRIAs, but even without the change, the volume of such orders decreased substantially for banks of all sizes.
Overall, the report painted a picture of a strong banking system that continues to show signs of improvement relative to the doldrums of 2022 and 2023. Fair value losses on investment securities, which exploded when the Fed began tightening monetary policy four years ago, continued to abate as interest rates fell last year. Total deposits climbed north of $18 trillion, reducing reliance on costly wholesale funding and driving up net interest margins to their high levels since the pandemic.
Credit default swap spreads closed out 2025 at their lowest level since 2015, signaling rising market confidence in banks. Spreads began widening in March and April amid broader market volatility and rising economic uncertainty related to the war in Iran, but remained well below the peaks of 2023. Similarly, market leverage ratios are the highest they've been in a decade.
Top concerns for community and regional banks included credit risk concentrations, credit loss allowances and loan underwriting — with commercial real estate being an area of particular focus. The report also flagged high reliance on volatile funding sources and liquidity and fund planning for banks with less than $100 billion of assets.
For larger banks, the report pointed to capital planning, interest-rate risk, market and counterparty credit risk, internal liquidity stress testing, inter-affiliate funding flows, and liquidity and financial position monitoring. For global systemically important banks, the report notes that recovery and resolution planning will be ongoing areas of focus.
The report also highlighted lending to nondepository financial institutions, or NDFIs, as a development to watch for large banks. Nondepository financial institutions were far and away the fastest growing category of loans in 2025 and 2026, growing nearly twice as fast as any other loan type.
"Though regulatory data shows limited delinquencies in this category, several high-profile NDFI defaults have led to concern about the private credit sector," the report notes. "Supervisory work shows that some banks are revisiting collateral management practices for these exposures."
