Fed’s Supervision Cuts and the GENIUS Act: Regulatory Reform Reshapes Bank Oversight

The recent developments at the Federal Reserve reflect a significant pivot away from post-Dodd-Frank supervision toward a more efficiency- and risk-centered regulatory philosophy under Michelle Bowman. While many changes parallel what the inspiration article terms the “Bowman Doctrine,” a close review of authoritative sources reveals a more nuanced picture.

What the data shows: In late October 2025, an internal Fed memo revealed plans to reduce the headcount in the Supervision & Regulation Division by approximately 30%, lowering authorized staff from roughly 500 to 350 by end-2026, largely via voluntary buyouts and retirement incentives. That number is consistent with broader efforts under Powell’s leadership to shrink Fed staffing by ~10%.

On November 18, 2025, the Fed publicly released a “Statement of Supervisory Operating Principles.” Key elements of the shift include: prioritizing “material financial risks” over process and documentation burdens; restoring non-binding supervisory observations for less severe issues; narrowing the issuance of MRAs and MRIAs to those deficiencies materially impacting safety and soundness; tailoring supervision more tightly according to institution size, complexity, and systemic importance; and restricting horizontal reviews in the LISCC and LFBO portfolios unless costs are justified.

The GENIUS Act, enacted July 18, 2025, has introduced the first comprehensive U.S. national framework for payment stablecoins. It mandates one-to-one reserve backing with specified assets, establishes permitted issuer regimes under both federal and state oversight, and prohibits the issuance of interest/yield on stablecoin holdings. It aligns with Fed’s broader deregulatory shift by enabling fintech participation and payment settlement integration while seeking to limit systemic and consumer risk.

Contrasts with the inspiration article: Several claims in the “Bowman Doctrine” article align with documented reform trajectories—such as the 30% staff cut or reweighting of emphasis toward material risks—but others appear exaggerated or unsubstantiated. For example, there’s no public evidence that horizontal reviews have been universally banned; rather, their use is now conditioned on cost-benefit analysis and senior supervisory approval. Nor has there been public confirmation of rebranding of the “Operations Unit” as the “Business Enablement Group” with a high-level “industry engagement” role. These seem speculative or internal observations without verification in authoritative sources.

Strategic implications for financial institutions:

• Large and systemically important banks will benefit from reduced compliance burdens, particularly in areas of documentation, process, and reporting. This could translate into lower operational costs and potentially higher return on equity.
• Internal audit, governance, risk, and compliance teams now bear more responsibility in validating remediation of issues; their performance and independence will face closer scrutiny.
• Smaller banks or community institutions—traditionally less burdened by supervision, but weaker in resources—may face challenges distinguishing themselves and establishing processes matching supervisory expectations. There is risk that they are penalized by lack of capacity to attract supervisory confidence.
• Consulting and law firms specializing in compliance, regulatory remediation, or supervisory proceedings may see reduced demand, especially for process-heavy consulting. However, demand may increase for advisory work on internal audit strengthening, governance, risk management, and fintech/stablecoin participation strategies.
• Stablecoin issuers and fintechs will have clarity under GENIUS Act; the path forward includes navigating licensing, reserves, state vs. federal oversight, and ensuring compliance with no-yield stipulations. Banks positioned as permitted payment stablecoin issuers may have first mover advantage.

Open questions and risks:

• Will reduced staffing undermine the Fed’s ability to respond swiftly to emerging risks (e.g., rapid asset price swings, crypto exposures, CRE stress)? Observers including former Vice Chair Michael Barr have warned of weakening oversight.
• Are the thresholds and definitions for “material risk,” MRAs/MRIAs, and “unsafe or unsound” practices sufficiently clear to avoid ambiguity, gaming, or regulatory arbitrage?
• How will market participants—particularly smaller institutions—adapt to changing expectations for internal audit functions and governance? Will capacity constraints generate new vulnerabilities?
• What is the cumulative impact on financial stability of simultaneous deregulatory moves, especially in capital requirements, stress testing, and comparative peer group oversight?