Factbox-How Trump's bank regulators are paring back supervision

By Pete Schroeder and Michelle Price

WASHINGTON, May 26 (Reuters) - Republican President Trump's regulators are undertaking the biggest overhaul of bank supervision since the 2008 financial crisis. They say examiners have become too preoccupied with processes and pursuing minor issues, and should focus on core financial risks. Critics ‌say that, together, the changes will weaken the financial system. Here are some of the key changes.

REFOCUSING SUPERVISION ON 'MATERIAL' RISKS

The Federal Reserve, the Office of ‌the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) have together raised the threshold for supervisory findings by focusing examiners on "material financial risks," as opposed to paperwork and process issues that do not ​pose immediate hazards to a lender's safety and soundness.

As part of that shift, the regulators have stopped policing reputational risk, a metric which banks had long complained gave examiners too much leeway to ding them on subjective grounds. Trump has also personally complained that banks have hidden behind reputational risk management to deny services to conservatives, claims they deny.

Critics say the changes have weakened examiners' powers to police problems that do not inherently amount to material financial risks, but which may eventually lead to problems - such as control lapses, governance ‌or other process issues.

RESTRICTING THE USE OF 'MRA' NOTICES

To ensure examiners ⁠focus on material risks, the agencies have restricted the use of "matters requiring attention (MRAs)," confidential directives requiring lenders to fix issues or face a potential enforcement action.

For over a decade, MRAs have been examiners' primary tool for policing lenders, but banks say they are frequently ⁠used for minor issues. Examiners may now only issue MRAs for material financial risks. For other issues, they can issue so-called nonbinding "observations," the agencies have said.

If a bank proactively identifies a problem that would normally have triggered an MRA and begins fixing it, bank examiners have been directed to issue an observation.

The OCC and FDIC have also proposed rules that would narrow the ​definition ​of "unsafe and unsound" practices that should be policed by examiners.

REDUCING OVERLAPS, LEANING ON BANKS' INTERNAL AUDIT

The ​bank regulators have directed examiners to more closely coordinate with each ‌other to minimize duplicative work. The Fed has told staff to rely to the "fullest extent possible" on examination work by other agencies when they are the lender's primary watchdog, and to conduct their own examinations only when it is not "reasonably possible" to rely on someone else's work.