How Banks and Regulators Can Adapt to the Future

In a speech delivered at the New York Fed Regional and Community Banking Conference earlier this month, Michelle Bowman, a Governor on the US Federal Reserve Board, discussed how bankers and supervisors can adapt to the changing financial system.

"Today, we find ourselves at an inflection point in banking and financial services," Bowman said. “Some traditional risks—like liquidity risk and interest rate risk—have become a higher priority concern for banks and regulators, while other risks—like third-party risk and cybersecurity risk—continue to evolve and pose new challenges.”

These developments create a responsibility for banks and their regulators to consider how they can work to maintain financial stability and consumer protection going forward. "Banks must ensure their risk-management frameworks appropriately identify, measure, monitor, and control for both existing and emerging risks," Bowman argued. “They must continue to innovate responsibly and ensure their risk-management frameworks account for novel product offerings both prior to implementation and as the service and customer engagement evolves.”

Regulators, for their part, must consider the tradeoffs in their approach to regulation and supervision to support banks through this journey. This will necessitate clear communication with the banks to ensure they understand the rules of the road. Supervisors must also develop their capabilities to identify, supervise, and regulate these emerging risks effectively.

"[W]e must appropriately and effectively manage our supervisory programs, teams, and expectations to ensure that efficient, effective, and consistent supervision is implemented across our regulated entities according to a bank's complexity, size, risk profile, and scope of activities," Bowman said. “Conducting supervision in a manner that respects due process and provides transparency around supervisory expectations goes a long way in accomplishing these goals.”

For more of Michelle Bowman's thoughts on regulatory transparency and accountability, read her contribution to our recent Deeper Dive report, "Physician, Heal Thyself."