Capitol Hill Examines Rulemaking as Nonbanks Gain Ground

A Capitol Hill hearing Tuesday (Dec. 2nd) on prudential oversight made clear one problem looms over bank regulation: rulebooks designed for a different era.

Lawmakers from the House Financial Services Oversight Committee heard from senior officials from the Office of the Comptroller of the Currency, Federal Reserve, FDIC and National Credit Union Administration describe a regulated banking system under competitive pressure from nonbanks, FinTech companies and stablecoin issuers, and a supervisory framework that needs rapid modernization to keep up.

Jonathan Gould, Comptroller of the Currency, said the agency’s objective innovation, including artificial intelligence (AI) and payment stablecoins, must be integrated into oversight through rulemaking that protects safety without stymieing emerging technology.

Nonbanks and Competitive Pressure

Michelle Bowman, Vice Chair for Supervision at the Federal Reserve, warned that nonbank financial institutions already control a significant share of lending. She said nonbanks are “providing strong competition to regulated banks without facing the same capital, liquidity, and other prudential standards.”

Bowman told lawmakers that banks must be “empowered to compete effectively with nonbanks” by innovating in payments and digital assets with regulatory clarity.

FDIC Acting Chairman Travis Hill echoed the point from a different direction, telling lawmakers that the FDIC is reviewing its bank resolution bidding process to “enable the participation of nonbank entities” under a pre-qualification system for failed-bank auctions that will begin piloting in early 2026.

NCUA Chairman Kyle Hauptman described a credit union sector facing new technology directly. The responses must be rooted in “leveraging artificial intelligence and cryptocurrencies” while focusing on “measurable and material risks.”

Health of the Financial System

The regulators described a financial system that is healthy. Bowman reported that “the banking system remains sound and resilient” with “strong capital ratios and significant liquidity buffers.”

Loan performance has improved and profitability is strong across most categories. Hauptman said the credit union system remains stable, noting that as of mid-2025 “more than 81% of federally insured credit unions have a composite CAMELS rating of 1 or 2.”

Asset growth and net worth ratios have risen and the industry remains profitable.

Hill described supervisory reforms intended to promote financial stability by improving the timeliness and focus of bank examinations and by refining capital requirements to support “low-risk activities that are critical to the functioning of the financial system.”

Technology in the Banking System

Every agency representative tied technology directly to rulemaking. Bowman said regulators must provide “clarity in treatment on digital assets” and “regulatory feedback on proposed new use cases” so banks can experiment responsibly.

Gould said the OCC plans to use rulemaking to integrate emerging technologies, including AI, into bank supervision and internal agency operations. He said modernizing OCC operations through “technology, data, and AI” would produce “more efficient supervision and lower assessment fees.”

Hauptman offered a granular example: NCUA launched an AI resources page to guide credit unions through AI implementation, risk management, cybersecurity and data safeguards, positioning regulation as a support structure rather than a barrier.

Rulemaking: A Shift in How Regulators Govern

Regulators provided unusually detailed testimony on active rulemaking efforts. Hill said the FDIC and OCC jointly issued a proposed rule to define an “unsafe or unsound practice” and to set “uniform standards for matters requiring attention and non-binding supervisory observations as part of the examination process.” That rule would move enforcement into a clearer legal structure and narrow examiner discretion to material safety-and-soundness concerns rather than process issues.

Bowman said the Federal Reserve is considering a rule to “clarify the standards for enforcement actions based on an unsafe or unsound practice, Matters Requiring Attention, and other supervisory findings.”

She also described separate rulemakings on stress test disclosure and changes to the supplementary leverage ratio to prevent capital rules from becoming binding constraints that discourage low-risk banking activities. Witnesses also referenced the GENIUS Act, which requires stablecoin regulation. Gould said the OCC is drafting rules to “balance innovation with prudence” for payment stablecoins.

Hill said the FDIC expects to issue a proposed rule to “establish our application framework” in December and a proposed rule to implement prudential requirements early next year.

During the back and forth with lawmakers, Rep. Barry Loudermilk (R-Georgia) stated that his own interactions with local businesses revealed that government regulation are their largest costs. He directed questions to Hill tied to the Bank Secrecy Act, and specifically lower dollar vs. higher dollar reporting. “Those thresholds have not been changed for many years,” said Hill, “and the amount of reports that are filed by financial institutions is extremely large … taking a close look at this makes a lot of sense.”

Regarding security, Rep. Joyce Beatty (D-Ohio) said noted the rise of fraud, including check fraud. Fraud is the “number one concern that I am hearing from banks and credit unions,” said Beatty. With a nod towards the agencies’ request for comment tied to check fraud, Bowman said that account openings are among the most critical areas to examine. Hauptman said that public blockchains help “eliminate some of these issues that can happen with other forms of payment.”

Recommendations and Regulatory Outlook

Witnesses offered direct suggestions to Congress. Bowman said statutory thresholds in bank regulation “have not been updated for years” and that inflation has caused small banks to fall under rules “intended for much larger banks.”

Hill urged lawmakers to support reforms that ensure supervisory criticisms remain tied to safety and soundness rather than reputational or political considerations. Hauptman recommended that Congress support regulatory relief that encourages innovation at credit unions.