Fed Trims Bank Oversight Staff, Crypto Clarity Weighs on Bitcoin

The Federal Reserve on Thursday unveiled a detailed staff manual to guide the supervision of large banks, signaling a push for greater transparency in its regulatory role according to Bloomberg. The new document outlines internal processes and standards for monitoring financial institutions, part of a broader effort by Fed Vice Chair for Supervision Michelle Bowman to modernize bank oversight. "By enhancing our supervisory transparency, we are holding ourselves to high standards," she said in a statement.

The move comes as the Fed continues to refine its regulatory approach, including the removal of "reputation risk" from bank exam considerations. This decision, initially made by Trump-era regulators, aligns with Republican lawmakers' calls to eliminate what they see as unfair practices. The Fed has said it will release additional documents in the coming year, including manuals related to liquidity planning and the oversight of large bank operations.

Separately, concerns over "debanking" in the crypto industry have drawn the attention of Fed Chairman Jerome Powell. During a Senate hearing, Powell acknowledged the issue, where banks are reluctant to serve crypto firms due to regulatory fears. He noted that the Fed is already revising internal policies to address the trend. Powell also praised efforts to develop regulatory frameworks for stablecoins and confirmed that the Fed has no plans to issue a central bank digital currency according to CoinDesk.

Why the Standoff Happened

The shift away from "reputation risk" reflects a broader policy debate over the role of subjective factors in bank regulation. Critics argue that the practice allowed regulators to penalize institutions for issues like public criticism, even if their financial health was sound. The removal of this criterion has been supported by Trump appointees and lawmakers who see it as a step toward fairer oversight.

Michelle Bowman, the Trump appointee leading the Fed's supervisory reform, has also taken steps to reduce staff in the supervision division by 30%. These changes are part of a larger trend to streamline regulatory efforts and refocus the Fed's mandate on core functions, such as maintaining financial stability and controlling inflation.

How Markets Reacted

The announcement of the new supervision manual did not immediately trigger major market reactions, as most of the changes are procedural. However, the Fed's stance on crypto and stablecoins has had a visible impact. Bitcoin, for instance, fell more than 2% on Tuesday amid ongoing uncertainty about regulatory clarity in the digital asset space. While Powell expressed cautious optimism about the future of stablecoins, he emphasized the need for a robust regulatory framework to protect consumers.

Powell's dismissal of CBDC plans also aligned with broader political resistance in Washington. The prospect of a U.S. digital dollar had long been a concern for crypto firms, who feared it could undermine private digital assets. With the Trump administration and congressional leaders opposing such efforts, the likelihood of a U.S. CBDC has all but vanished.

What Analysts Are Watching

The Fed's supervisory reforms are expected to continue into next year, with more documents set to be released. Market participants are paying close attention to how these changes will affect bank lending, capital requirements, and the overall stability of the financial system. In particular, the removal of MRIAs from banks like Citigroup has been seen as a sign that the Fed is becoming more flexible in its approach to regulatory compliance.

Analysts are also watching the Fed's evolving stance on inflation. Two top officials—New York Fed President John Williams and Fed Governor Stephen Miran—recently expressed confidence that inflation will cool without major policy intervention. Miran, a Trump appointee, argued that current inflation readings are inflated by statistical quirks and that the Fed should continue rate cuts to support the labor market according to Morningstar.

Williams, by contrast, believes the Fed is well-positioned to navigate the coming years and does not expect significant changes in interest rates. Their differing views highlight the ongoing debate within the central bank about the right balance between inflation control and supporting economic growth.

As the Fed moves forward with its supervisory and regulatory agenda, it faces the challenge of maintaining credibility while responding to political and market pressures. With the next chair likely to be chosen from a slate of Trump-aligned appointees, the central bank's future direction could shift further toward deregulation and a narrower focus on core monetary policy goals.