In a speech delivered at an American Bankers Association conference earlier this week, Michelle Bowman, a Governor on the US Federal Reserve Board, explored how regulators can perform "maintenance" on the regulatory framework in response to what she sees as a "troubling trend of inaction and opacity within the supervisory toolkit."
"System maintenance is not something that we should shy away from," Bowman said. “In our everyday lives, we invest significant time in maintenance ... Devoting resources to maintenance often prevents more costly issues down the road—it's easier to get oil changes than it is to rebuild an engine.”
Bowman highlighted the increasing subjectivity of supervision as a concern, especially as it pertains to non-financial risk matters like operational risk, management, risk management, internal controls, and governance. While these issues are important, Bowman argued, they are frequently prioritized over material financial risks. "For all institutions, financial metrics are not among the primary findings determined from the examination process, and arguably they have been de-emphasized when assigning supervisory ratings," she said.
Bowman stressed the importance of prioritization in supervision, both to inform supervisors where they should allocate their time and to help banks allocate limited resources more effectively. The number of supervisory findings related to non-financial risks may stem from to the time it takes to remediate these long-standing issues, she noted. "However, we should also be vigilant and deliberate about any shift in supervisory focus from financial risk toward non-financial risks and internal processes, as this shift is not focused on fundamental safety and soundness issues and it is not cost-free," Bowman argued.
Bowman also repeated her previous calls for more accountability and transparency in supervision. "Accountability is critical to maintaining an effective regulatory system, and yet it can be difficult to establish a regulatory culture that includes mechanisms to promote accountability for supervisors and regulators," she said. When things go wrong in supervision, an impartial check is essential to learn how to improve going forward, Bowman argued.
For more from Michelle Bowman on the importance of accountability and transparency in supervision, read her In Focus contribution to Starling's 2024 Compendium.
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