In a speech delivered last week, Michelle Bowman, a Governor on the US Federal Reserve Board, argued that public debates about whether regulations are "hard enough" on banks misinterpret the dynamics of how regulators and banks should operate.
"[B]ank regulation and supervision need not be an adversarial system, with banks and regulators acting in opposition," Bowman said. “Rather, banks and regulators often have the shared goal of a banking system that is safe, sound, and effective, with each serving an important role in furthering these objectives.”
Of course, there are tradeoffs in regulation that cannot be ignored. The Federal Reserve is statutorily responsible for promoting the safety and soundness of individual banks and for ensuring the stability of the broader financial system. These goals must be balanced with the desire to ensure that the US banking system can serve the economy and facilitate economic growth, Bowman explained.
"The process of any reform or change to the bank regulatory framework should begin with an identification of the problem, followed by an analysis of whether proposed solutions are within the agency's statutory authorities, and an evaluation of whether targeted changes could result in improvements, remediation of gaps, or elimination of redundant and unnecessary requirements," Bowman said. “The resulting framework will better promote safety and soundness in a more durable and consistent way over time, while also continuing to support economic growth.”
Further, when revising the regulatory framework, regulators should prioritize transparency and compliance with administrative procedures, Bowman said. Not only will doing so promote "trust and accountability to the public," Bowman contended, but it will also enable industry innovation as firms will better understand how to undertake new activities.
"A deliberate, transparent, and fact-based approach to pursuing statutory objectives helps us 'show our work,' that we are focused on pursuing our policy goals, and are avoiding straying into political concerns outside of statutory purposes or functions," Bowman argued. “Promoting safety, soundness, and financial stability should not devolve into an exercise of regulatory allocation of credit—picking winners and losers—or promoting an ideological position through more open-ended processes like bank supervision and examination.”
This transparency must also extend to supervision. Necessarily, much of the information surrounding supervision is confidential, as the release of commercially sensitive information could harm an institution. However, in practice, the breadth of what has been termed "confidential supervisory information" (CSI) serves to shield information from public scrutiny and hamper banks from engaging in discussion to gain a better understanding of supervisory expectations, Bowman said.
"Supervisory expectations should not surprise regulated firms, and yet changes in supervisory expectations often arise in the course of an ongoing examination," she argued. "As a result, the ability of a financial institution to be proactive—to work to meet any new expectations—is impossible until they have received supervisory feedback."
For more from Michelle Bowman, read her In Focus contribution to Starling's 2024 Compendium.
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