WASHINGTON D.C. — A comprehensive new study by the Brookings Institution has pulled back the curtain on a decade of shifting financial oversight, revealing a startling divergence in how America’s top banking regulators police the industry. According to researchers Aaron Klein and Justin Connell, the Federal Reserve has overseen a dramatic and "perplexing" decline in enforcement actions over the last ten years—a period marked by significant bank failures and a steady consolidation of the financial sector.
The report, which analyzed public enforcement data from 2015 to 2025, suggests that the Federal Reserve’s willingness to reprimand the banks under its purview has plummeted by more than 58% since the departure of former Fed Governor Daniel Tarullo in 2017. This trend persists despite the high-profile collapse of Silicon Valley Bank (SVB) in 2023, an event that many critics and the Fed’s own internal reviews attributed to a "too deliberative" and lax supervisory culture.
Main Facts: A Decade of Declining Oversight
The core of the Brookings report centers on a comparative analysis of the three primary federal banking regulators: the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve (the Fed). While the banking industry as a whole has shrunk due to consolidation, the decline in enforcement at the Fed far outpaces the reduction in the number of institutions it oversees.
Between 2015 and 2025, the total number of lenders in the United States dropped by approximately 30%, falling from 6,182 to 4,336. However, the regulatory response to this smaller field of players has been uneven:
- The Federal Reserve: Saw a staggering decline in enforcement actions, dropping from an average of 81 per year (2017–2019) to just 42 per year (2023–2025).
- The FDIC: Experienced a moderate dip, moving from 168 annual actions to 126 in the same period.
- The OCC: Actually saw a slight uptick in enforcement activity, rising from 91 to 95 annual actions, despite supervising 36% fewer banks than it did a decade ago.
The researchers highlighted that when controlling for the number of banks each agency regulates, the Fed’s retreat becomes even more pronounced. While the OCC has become more aggressive on a per-bank basis, the Fed has moved in the opposite direction, raising questions about whether the central bank is failing to identify systemic risks or simply choosing not to act on them.
Chronology: From the Post-Crisis Era to the "Ratchet" Effect
To understand the current state of bank supervision, the Brookings researchers tracked enforcement trends across three distinct presidential administrations, challenging the popular narrative that regulation follows a simple partisan "pendulum."
The Tarullo Era (2015–2017)
The study begins during the tail end of the Obama administration, when Daniel Tarullo served as the de facto vice chair of supervision. During this period, the Fed maintained a robust enforcement posture, a legacy of the 2008 financial crisis. Tarullo was known for a "tough-cop" approach, emphasizing stringent capital requirements and frequent formal enforcement actions to ensure compliance.
The First Trump Administration and the "Quarles Shift" (2017–2021)
Following Tarullo’s departure in 2017, Randal Quarles was appointed as the first official Vice Chair for Supervision. Under this tenure, the researchers noted a sharp decline in formal enforcement. The narrative at the time suggested a "regulatory right-sizing," but the data shows the beginning of a sustained downward trend in formal reprimands that would not reverse even after the administration changed.
The Biden Era and the SVB Crisis (2021–2024)
Under the Biden administration and Vice Chair Michael Barr, many expected a return to the Tarullo-era aggression. However, the Brookings data shows that enforcement levels largely "leveled off" rather than rebounding. This period was defined by the March 2023 collapse of Silicon Valley Bank—a Fed-regulated entity. The failure served as a grim validation of the researchers’ concerns, proving that a lack of formal enforcement can allow idiosyncratic risks to balloon into systemic threats.
The Second Trump Term Transition (2025)
As the study concludes in 2025, the researchers noted that early data from the second Trump administration suggests the trend of lower enforcement is holding steady. They describe this as a "ratchet-level phenomenon" rather than a pendulum: regulation drops significantly under Republican leadership but fails to return to previous heights under Democratic leadership.
Supporting Data: Consolidation vs. Enforcement
The researchers addressed a common defense used by regulators: that there are simply fewer banks to penalize. While the number of banks has indeed fallen, the complexity and asset size of the remaining banks have grown exponentially.
Table: Comparison of Enforcement Action Declines (2017–2019 vs. 2023–2025)
| Agency | Period A (Avg Actions/Yr) | Period B (Avg Actions/Yr) | % Change |
|---|---|---|---|
| Federal Reserve | 81 | 42 | -48.1% |
| FDIC | 168 | 126 | -25.0% |
| OCC | 91 | 95 | +4.4% |
| Total (All Agencies) | 341 | 263 | -22.8% |
The data reveals that the Fed’s decline is nearly double the industry average. Furthermore, the OCC’s data serves as a control group; if the OCC can increase enforcement while overseeing 36% fewer banks, the Fed’s 48% drop cannot be explained away by industry consolidation alone.
Klein and Connell pose a pointed binary: either banks regulated by the Fed have magically become significantly more compliant than those overseen by the OCC and FDIC, or the Fed has "pulled back on supervision—willfully by not elevating problems to the level of an enforcement action, or by ignorance in failing to find such problems."
Official Responses: The "Too Deliberative" Defense
The Federal Reserve has not been silent regarding its supervisory shortcomings, particularly in the wake of the 2023 regional banking crisis. In a self-critical review led by Vice Chair Michael Barr following the SVB collapse, the Fed admitted that its supervisors were often too slow to act.
The Fed’s internal review described its own culture as "too deliberative and focused on the continued accumulation of supporting evidence in a consensus-driven environment." In simpler terms, Fed examiners often identified problems but spent months or years debating the nuances of those problems rather than issuing formal enforcement actions that would compel the bank to change.
However, Klein and Connell argue that this "deliberative" culture may be a systemic feature rather than a bug. They expressed concern that the Fed’s new proposed supervisory principles seem to double down on this approach. These new principles suggest that bank examiners should give "greater deference" to a bank’s own conclusions about whether they have fixed a problem.
"It is even more perplexing," the researchers wrote, "that the Fed would move toward new supervisory principles which seem to raise the bar for enforcement actions" at a time when their current track record is already under scrutiny for being too passive.
Implications: The Risk of a "Paper Tiger" Regulator
The findings of the Brookings study carry heavy implications for the future of the American financial system. If the Federal Reserve continues to move away from formal enforcement actions, the researchers warn of several potential outcomes:
1. Erosion of Market Discipline
Formal enforcement actions serve as a signal to the market. When the Fed issues a Cease and Desist order, investors and depositors take note. A move toward "informal" supervision or "deference" keeps problems behind closed doors, preventing the market from accurately pricing the risk of specific financial institutions.
2. Regulatory Arbitrage
The discrepancy between the OCC’s uptick in enforcement and the Fed’s decline creates an environment ripe for regulatory arbitrage. Banks may seek to change their charters or organizational structures to fall under the "softer" supervision of the Federal Reserve, potentially leading to a "race to the bottom" in safety and soundness standards.
3. Increased Systemic Vulnerability
The Silicon Valley Bank failure demonstrated that problems in the banking sector can move faster than a "consensus-driven" regulatory body. If the Fed remains hesitant to use its enforcement "teeth," the likelihood of another "blind spot" failure increases, potentially requiring further taxpayer-funded interventions or emergency liquidity facilities.
4. The Institutionalization of the "Ratchet"
The study’s most cynical conclusion is that the "ratchet effect" is becoming the new normal. If Democratic administrations cannot or will not restore enforcement levels to previous benchmarks, the long-term trajectory of bank oversight is one of permanent decline. This suggests that the post-2008 era of "tough" regulation may have been a temporary anomaly rather than a permanent shift in the American regulatory landscape.
As the financial sector moves further into 2025, the Brookings report serves as a stark warning: a regulator that refuses to regulate is a regulator in name only. For the Federal Reserve, the challenge will be proving that its "deliberative" approach is a sign of sophistication rather than a symptom of institutional paralysis.
