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Financial institution regulators — including the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Federal Reserve — are facing significant downsizing. This trend raises critical questions about the safety and soundness of financial oversight and the decisions board members must make in response. Let’s explore the implications of a reduced regulatory workforce, the risks tied to longer intervals between examinations, and the potential shifts in spending priorities.
The Shrinking Regulatory Workforce: A Cause for Concern?
The FDIC, NCUA, OCC, and Federal Reserve have been pivotal in ensuring the stability and integrity of the banking and credit union sectors. However, recent directives from the current administration have led to substantial staff reductions across these agencies.
The FDIC, for instance, has seen a workforce reduction of about 9% since January 2025, driven by deferred resignation offers and layoffs of probationary employees. According to Banking Dive, the FDIC aims to reduce its workforce by 1,250 — nearly 20%. Notably, the Voluntary Early Retirement Authority (VERA) and the Voluntary Separation Incentive Program (VSIP) are not being offered to “mission critical” employees such as those in risk management and information security.
Similarly, the NCUA has pulled back job offers and discussed early retirement programs in closed board meetings. Regulatory Report states the NCUA is considering a 16% staff reduction, or approximately 200 positions, which would likely impact its ability to perform supervisory functions.
The OCC has laid off more than 75 probationary employees and shed approximately 140 staff through buyouts and deferred resignations. These reductions align with broader federal efforts to streamline operations and reduce costs.
The Federal Reserve is also affected, with staffing cuts across financial regulatory agencies contributing to a larger campaign to trim $1 trillion in federal spending.
While the intention behind these measures is efficiency, the resulting gaps in financial oversight could have serious consequences.
Unintended Unsafe Conditions
One of the most pressing concerns is that fewer regulatory staff could lead to longer gaps between examinations — critical moments for identifying risks, ensuring regulatory compliance, and maintaining financial stability.
Consequences of reduced oversight include:
- Delayed detection of issues: Problems may go undetected longer, making them harder and more expensive to fix.
- Increased risk exposure: Institutions may take greater risks when they believe scrutiny is less frequent.
- Erosion of regulatory compliance: Less frequent exams can lead to diminished focus on compliance, as short-term priorities crowd out long-term risk mitigation.
Impact on Information Technology Spending
The downsizing of regulatory staff doesn’t just affect compliance — it may influence how board members allocate resources, particularly in information technology (IT) and information security (IS).
Several factors contribute to this potential shift in spending priorities:
- Perceived reduced need for compliance: Fewer exams might lead boards to deprioritize technologies that support compliance.
- Short-sighted cost-cutting: Institutions may delay or reduce IT and IS investments to save money — a move that can weaken their cybersecurity posture.
- Shift in strategic focus: Funds may be reallocated to other initiatives, potentially neglecting essential tech and security infrastructure.
Essential Oversight: Why Audits Matter More Than Ever
With reduced regulatory presence, external IT and IS audits become essential tools for financial institutions committed to maintaining high standards of security and compliance.
Benefits of regular external audits include:
- Independent verification: Third-party reviews help identify vulnerabilities and gaps that internal teams may miss.
- Regulatory compliance: Audits help institutions stay aligned with regulations — even when oversight is less frequent.
- Proactive risk management: External audits uncover and address issues early, allowing institutions to mitigate risks before they escalate.
- Stakeholder confidence: Independent assessments reassure customers, investors, and regulators alike.
What Sets Effective Risk Management Apart
Cyber threats aren’t slowing down, especially as AI introduces new risks. Smart investments in technology and sound risk management practices are essential. That includes regular cyber risk assessments to guide informed, prioritized decisions about which risks to mitigate next. These assessments keep financial institutions out of breach headlines — and out of regulators’ crosshairs — while ensuring they can continue serving customers without disruption.
Effective risk management isn’t just about checking boxes — it’s about protecting the institution and the people it serves. That protection becomes even more crucial as traditional oversight scales back.
Navigating Risk in a Time of Reduced Oversight
The downsizing of key financial regulators presents serious challenges. However, institutions aren’t powerless. External IT and IS audits offer a meaningful way to uphold oversight standards, even as federal agencies reduce staff. By providing independent verification, ensuring regulatory compliance, managing risks, and enhancing stakeholder confidence, external audits play a crucial role in maintaining the safety and soundness of the sector.
As financial institutions navigate these changes, it’s essential to strike the right balance between cost-saving initiatives and continued investment in oversight and technology. Sustaining trust, stability, and operational resilience requires a proactive, risk-informed approach, even in the face of reduced regulatory scrutiny.
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