How Regulators Can "Get Comfortable" with Innovation

In a speech delivered last week, Michelle W. Bowman, a Governor on the US Federal Reserve Board, explained how regulators can "get comfortable with innovation" and better support industry efforts to innovate while minimizing risks to financial stability and consumers.

"As a first principle, I would offer 'understanding' as a necessary predicate to promoting innovation," Bowman said. "Before we craft a useful public policy around innovation in banking, we need to understand the various dynamics involved with particular innovations."

Innovation can take many forms, to include new technology, new business models, and enhancing existing infrastructure and processes. Regulators must understand the new technology that is being developed if they are to promote innovation effectively, Bowman argued. They must also understand the players in the space and the "why" behind the innovation in order to assess any risks and tradeoffs.

"As a second principle, regulatory openness is a critical ingredient to fostering innovation in the financial system," Bowman said. "The first reaction of regulators to proposed innovation in the banking system is often not one of openness and acceptance, but rather suspicion and concern." There are certainly questions regulators must ask when considering the intended and unintended consequences of innovation, she acknowledged. And clear and consistent guardrails are needed to govern such activity. However, these concerns must be confronted if innovation is to flourish. "Ensuring an orderly and observable method for regulators to understand and provide a path for potentially disruptive or transformational technology could ultimately enhance the long-term stability of the financial system," Bowman asserted.

"Understanding and openness can go a long way to promoting innovation, but I think there are opportunities to do more," she concluded. "This leads to my final principle, which is that regulators can do more to promote innovation. Regulators can do more than simply tolerate innovation, they can promote it through transparency and open communication."

In an article for Starling Insights' "Physician, Heal Thyself" Deeper Dive, published earlier this year, Michelle Bowman argued that banking sector overseers should hold themselves to the same high standards of conduct they encourage in the industry — and that they must do so in a manner independent of political pressure and mindful of public accountability. These remarks will be reprinted in our upcoming 2024 Compendium. ▸ Learn More