A More Focused Regulatory Era Brings Greater Freedom, Greater Risk

Bank regulation in the United States has entered a new phase marked less by deregulation than by a decisive narrowing of priorities. In a wide‑ranging discussion with ProSight Financial Association on the current regulatory landscape, Oliver Wyman partner Doug Elliott described a shift away from prescriptive, checklist‑driven oversight toward a framework that emphasizes core financial risks, supervisory judgment, and economic growth. The result is greater flexibility and heightened responsibility for banks. 

An agenda focused on growth 

Across capital rules, liquidity requirements, and supervision, Elliott sees policymakers acting on a belief that regulation has increasingly constrained the banking sector’s ability to support the broader economy. 

“Trump 2.0 has been very different than Trump 1.0 in terms of changes for the financial sector,” Elliott said, describing the current administration as “much more assertive about changing regulation and supervision.” A defining feature of that assertiveness is the unusually prominent role of the U.S. Treasury, which has emerged as a central force in shaping policy. 

At the heart of the agenda is balance sheet flexibility. Regulators want banks to hold less capital and liquidity against perceived risks and deploy more of their resources into lending and investment. “Almost everything they’re doing is intended to help spur faster economic growth by freeing up the financial sector to be more helpful to the economy,” Elliott said. 

Capital regulation is a primary target. Multiple changes have already been announced, with others still moving through the proposal and comment process. Elliott believes that when the dust settles, required capital for U.S. global systemically important banks is likely to fall by about 10%. 

Liquidity regulation will also see consequential change. Elliott said regulators increasingly believe banks are holding substantially more high‑quality liquid assets than is optimal, driven by conservative definitions and long‑standing stigma around borrowing from the Federal Reserve. Policymakers are now exploring ways to expand what counts as liquid assets and make central bank facilities a more normal tool of liquidity management. 

If implemented broadly, Elliott said, “this would be a fairly big change.” Still, he cautioned that market perceptions are difficult to reshape. Even as regulators try to normalize usage, stigma may persist. “There’s no way to wash all that away,” he said, particularly when stakeholders already have concerns about an institution’s health. 

From prescriptive oversight to focused supervision 

Beyond changes to individual rules, Elliott described a deeper shift in supervisory philosophy driven, in part, by lessons from recent bank failures. 

Silicon Valley Bank stands out as a cautionary example. Supervisors identified dozens of issues at the institution, Elliott noted, yet “only a couple of them directly dealt with the risks that actually blew the bank up.” The problem was not a lack of scrutiny, he said, but a failure to prioritize. 

That experience has reshaped supervisory thinking. Rather than attempting to identify every conceivable weakness, regulators are narrowing their focus to what Elliott called “the classic things that blow up banks”: credit risk, interest‑rate risk, and maturity mismatch. There is a belief, he said, that doing so requires pulling back from expansive horizontal reviews and standardized mandates that treat very different institutions as interchangeable. 

“The new team is much less comfortable with these horizontal reviews,” Elliott said, citing a growing recognition that “every bank is different.” Differences in geography, customer mix, product focus, and management strategy mean risk is not uniform. 

The change is especially evident in credit oversight. Elliott said prior supervisory approaches often relied on blunt thresholds, such as simple leverage metrics, to define acceptable risk. Those standards frequently ignored borrower‑specific realities, the current thinking goes, and discouraged otherwise sound lending, he said. The new framework does not encourage reckless risk‑taking, he emphasized, but it does allow banks to “use their business judgment more” in underwriting and portfolio management.  

A slate of priorities 

While regulators are pulling back in some areas, Elliott stressed this is not a retreat from enforcement. Certain non‑financial risks remain central to supervision, particularly those rooted in legal mandates and systemic harm. 

Anti–money laundering, fraud, and financial crime continue to receive intense scrutiny. Elliott described fraud as a growing challenge even for large, sophisticated institutions and emphasized that AML obligations remain in force regardless of changes in supervisory tone. 

What has receded are softer, policy‑driven areas the new regulatory team does not view as central to safety and soundness. Issues such as ESG and DEI, once prominent in examinations and supervisory messaging, are receiving sharply reduced attention. The goal, Elliott said, is to free up both supervisory and institutional resources for risks that more directly threaten bank solvency. 

Even as flexibility expands, Elliott repeatedly warned banks not to assume the current environment will last. “You’re going to get switches back and forth” as administrations change, Elliott said, underscoring the risk of optimizing too narrowly for today’s regulatory stance. 

His advice is to ground decision making in sound risk management that makes business sense regardless of political control. Measuring and managing risk in ways that differentiate good exposures from bad ones should be “the core of what you do,” he said. 

That said, Elliott distinguished among types of regulatory risk. Capital standards may rise again under a future administration, but those changes are typically prospective, giving banks time to adapt. Regulatory action in the area of consumer protection could be a different story.  Actions tolerated today could later be deemed illegal, potentially triggering large fines. Even perceived supervisory approval, Elliott noted, offers limited protection. “That’s not a complete protection from a legal point of view at all,” he said. 

Technology, fragmentation, and persistent uncertainty 

Other themes Elliott addressed highlight how uncertainty now defines much of the regulatory landscape. One is fragmentation. As federal regulators step back in some areas, Elliott expects states to assert themselves more aggressively, especially on consumer protection and emerging technologies. Global banks face additional complexity when U.S. and European rules diverge. 

Artificial intelligence illustrates both the promise and ambiguity of this moment. Regulators, Elliott said, are still trying to understand how banks use AI, asking broad questions rather than imposing detailed mandates. Their focus is on outcomes, not on whether decisions are made by humans or machines. 

Generally speaking, regulators “don’t care whether you have a human or a machine doing this,” Elliott said, as long as underwriting and risk management are properly controlled. Over time, however, AI may shift from optional to expected, particularly as tools prove more effective in areas like fraud detection and AML. 

Digital assets present similar uncertainty. Policymakers have sought to ensure stablecoins function as payment instruments rather than deposit substitutes, but legislative gaps have fueled ongoing disputes. Banks, Elliott said, are reluctant to move aggressively in such an environment. Unlike many crypto firms, they want clarity that “the law clearly allows them to do it,” not just comfort from current regulators. 

Taken together, Elliott’s assessment portrays a regulatory environment offering more freedom but demanding greater discipline. Banks have more room to exercise judgment and tailor risk management—but they are doing so amid political swings, technological change, and conflicting authorities. The central challenge is to use today’s flexibility to strengthen fundamentals, not weaken them, in preparation for the possible shift in regulatory direction. 

This article was created from original ProSight content with the assistance of Microsoft CoPilot.