Shifting From Strong Federal Regulator Presence to More State-Level Supervision

The regulatory landscape is undergoing a noticeable shift as state regulators take on a more prominent role in oversight. While federal agencies such as the CFPB, FDIC, and Federal Reserve have historically been the dominant force in financial regulation, recent developments suggest that state-level regulators may increasingly step into the spotlight.

Drivers of the Shift

Several factors are contributing to this change. Federal spending reductions proposed for 2025 and planned workforce cuts at both the FDIC and Federal Reserve are expected to reduce the capacity for federal examinations. This could create longer gaps between federal regulatory exams and potentially leave oversight voids.

At the same time, federal regulators appear to be repositioning themselves from a posture of heavy scrutiny toward a more pro-business approach. As a result, states, which already oversee 75 percent of banks and most nonbank financial institutions, are preparing to step up their supervision to ensure consumer and market protections remain strong.

Potential Implications

One likely outcome is an increase in state-led audits and examinations, particularly in areas such as anti-money laundering (AML) and consumer protection, where any federal retreat would leave significant gaps. Institutions should anticipate more frequent state exams, heightened scrutiny in AML compliance, and potential challenges stemming from varying state rules.

Another area of concern is de-risking, where banks may pull back from higher-risk clients due to increased compliance uncertainty. This could create challenges for smaller institutions or nonbank entities navigating a patchwork of state requirements.

Preparing for a State-Focused Supervisory Environment

To succeed in this evolving environment, institutions can take proactive steps:

• Maintain and obtain licenses where required, leveraging tools such as the NMLS for streamlined licensing.
• Build compliance programs to meet the requirements of stricter states, which often provide coverage for other jurisdictions.
• Maintain strong AML and sanctions programs to satisfy both state and federal expectations.
• Regularly review enforcement actions to identify emerging areas of regulatory focus.
• Build strong relationships with state regulators and monitor rule changes to stay ahead of new requirements.
• Ensure staff training, independent reviews, testing, and monitoring are robust to avoid material gaps.

Challenges and Opportunities

Institutions should prepare for challenges such as more frequent state examinations, varying state rules, and the increased burden of meeting state-specific requirements. However, there are also opportunities. New legislation could provide clarity, chartering options at both the state and federal level may expand, and streamlined licensing through NMLS may reduce administrative burdens. Additionally, this environment may create space for innovation and the introduction of new products.

Looking Ahead

The shift from a strong federal presence to more state-level supervision represents a significant change for the financial services industry. While this transition may bring complexity and new regulatory hurdles, it also offers opportunities for institutions that are proactive, adaptable, and committed to maintaining strong compliance practices. Those that build resilient programs and strong state regulator relationships will be better positioned to thrive in a landscape where state supervision is becoming increasingly influential.

Bates Group supports banks, non-bank financial institutions, and fintechs as they navigate the shift from a strong federal presence to a more fragmented, state-driven supervisory landscape. Our team of former federal and state regulators, compliance officers, and industry practitioners helps firms align strategy, governance, and day-to-day operations with evolving state expectations. Contact us today to learn more and schedule a consultation.