Fed Reports on Banking Sector Developments

In its semiannual Supervision and Regulation Report, the Federal Reserve ("Fed") assessed the condition of the banking sector, recent regulatory actions, and current supervisory priorities.

In the Report, the Fed emphasized that the system is positioned to support continued economic growth and maintain stable capital and liquidity levels. The report highlighted a pivot in the Fed's supervisory approach, aiming to enhance transparency and streamline remediation. The Fed stated that examiners will focus more on "material financial risks" that impact safety and soundness, rather than on process and documentation deficiencies, and will work to reduce exam duplication.

The Fed highlighted findings in four areas:

1. Banking System Conditions. The Fed stated that the banking system remains solid, with more than 99% of institutions rated "well capitalized" and aggregate CET1 ratios holding near 13%. The Fed noted significant unrealized losses on securities—$143 billion on available-for-sale and $250 billion on held-to-maturity portfolios—but emphasized that liquidity remains stable, with deposits reaching a record $18.3 trillion in August 2025. Profitability was also strong, with ROE at 10.5%, though the Fed cautioned that consumer and commercial real estate delinquency rates remain elevated, including office loan delinquencies near 10% at large banks.
2. Regulatory and Supervisory Developments. The Fed highlighted its comprehensive capital framework review and several major rule changes. The Fed finalized a modification to the Supplementary Leverage Ratio, effective April 1, 2026, to reduce disincentives for holding low-risk assets such as U.S. Treasuries. It also proposed lowering the Community Bank Leverage Ratio from 9% to 8% and revising the stress-testing framework to enhance transparency around models and scenarios. The Fed further noted a shift in priorities reflected in the withdrawal of crypto-asset and climate-risk guidance and the sunsetting of the "novel activities supervision program."
3. Supervisory Priorities. The Fed said its supervisory focus remains tailored to institution size and risk profile. For community and regional banks, key priorities include credit risk—particularly in CRE and agriculture—along with liquidity risk management and IT/cybersecurity. For Large Financial Institutions, the Fed is prioritizing capital planning for interest-rate and market risks, internal liquidity stress testing, and operational resilience. It also noted revisions to the large financial institution rating system, effective January 16, 2026, under which a firm may be considered "well managed" even with one "deficient-1" rating.
4. Bank Applications and Merger Activity. The Fed reported approving 413 applications in the first half of 2025, including 74 merger and acquisition transactions. While many applications proceed efficiently, the Fed observed that complex transactions involving large firms may face prolonged reviews, citing one merger that required 393 days for approval due to competitive concerns and substantial public comment.