Increasing Shift Towards Policy through Examination in Financial Regulation

Firstly, the complexity of technologies like artificial intelligence complicates governance through pre-set rules. AI systems are probabilistic, making their behaviors hard to predict. Financial institutions also utilize services from various companies through application programming interfaces (APIs), which creates dependence on third parties that might not offer regulators clear oversight. This evolving technological environment requires continuous monitoring and agile governance, contrasting sharply with static regulatory approaches.

Secondly, the legal framework around agency rules has become less stable. Court decisions such as Seila Law v. Consumer Financial Protection Bureau have enhanced presidential control over regulators, resulting in policies that are more susceptible to changes in administration. Additionally, rulings like Loper Bright Enterprises v. Raimondo have reduced the deference courts give to agency interpretations of ambiguous laws. The impact of Corner Post v. Board of Governors of the Federal Reserve System further complicates matters, establishing that challenges to regulatory rules can arise long after those rules are deemed settled.

Consequently, regulators may increasingly turn to supervision—shaping policy through examinations and continuous oversight. This approach allows them to observe technology in practice, identify material risks, and adjust regulatory expectations based on real-world evidence, even if such guidance is not formally articulated.

To better manage this shift towards supervision, financial regulators will need to enhance their technological capabilities and transparency. This might involve establishing structured information flows and machine-readable data instead of relying on static reports. For instance, the Consumer Financial Protection Bureau’s publicizing of its Bayesian Improved Surname Geocoding methodology exemplifies how transparency can aid compliance.

Agencies will also require a diversity of expertise, incorporating professionals from fields such as software engineering and behavioral science alongside traditional examiners. With recent graduates entering the job market amid higher unemployment rates, this recruitment could be timely.

Moreover, regulators should redefine their supervisory perimeter to encompass entities like cloud providers and fintech firms that play essential roles in the functioning of regulated institutions. Existing laws, such as the Bank Service Company Act, offer some tools for oversight that could be expanded to adapt to these evolving dynamics.

Lastly, increased supervisory influence necessitates greater accountability. Congress and regulators must clarify under what circumstances supervisory findings can be legally challenged, ensuring that informal determinations do not inadvertently set regulation standards without proper safeguards. Balancing accountability with the need for candid discussions will be essential in this new supervisory framework.

Technology is rapidly evolving, rendering formal rules increasingly fragile. The regulatory system must adapt to these changes to ensure effective oversight in an era demanding greater transparency and accountability.