In her first public remarks as the US Federal Reserve Board's Vice Chair for Supervision last week, Michelle Bowman outlined a broad agenda for revisiting key aspects of the supervisory and regulatory framework, emphasizing pragmatism, tailoring, and a sharper focus on material financial risks.
Bowman argued that supervisory attention has drifted too far toward procedural and documentation issues at the expense of material risk. "Checklists should not distract examiners from the central purpose of examinations," she said, emphasizing the need to prioritize credit, liquidity, and interest rate risks. She also raised concerns about supervisory ratings, noting that "two-thirds of the largest financial institutions in the US were rated unsatisfactory in the first half of 2024," despite many meeting capital and liquidity expectations. The Fed, she said, will propose changes to its Large Financial Institution ratings framework to emphasize financial condition over other factors.
Bowman echoed her past calls for a more tailored approach to smaller banks. She questioned the gradual application of large bank standards to smaller institutions and suggested revisiting thresholds such as the current $10 billion threshold for community banks. "[T]he gradual erosion of distinct regulatory and supervisory standards among firms with very different characteristics — essentially the subtle reversal of tailoring over time — is not a reasonable approach for implementing supervision and regulation," she argued. Bowman announced plans to host a conference on small and community bank supervision later this year to further explore adjustments to the regulatory framework.
Bowman also emphasized the need to strengthen examiner training and address transparency in supervisory practices. She called for all staff involved in supervision to obtain or work toward the Federal Reserve's bank examiner commission, the Fed's certification program for bank examiners. She argued that“regulated entities should be able to expect that all of our examination and supervisory teams have achieved or are working to achieve this level of professional expertise.”
On horizontal reviews, Bowman warned that these exercises risk "creating generally applicable rules without complying with the Administrative Procedure Act." She criticized their tendency to rank firms against one another rather than assess whether each institution's practices meet supervisory standards given its individual business model and risk profile.
In an article for our 2024 Compendium, 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.
"Accountability is no less important for bank regulators than it is for banks," Bowman wrote. "Accountability also requires transparent policies and procedures and conducting supervision in a way that is predictable and fair. These actions demonstrate to the public and regulated institutions that the agencies hold not only those institutions but also themselves to high standards." ▸ Read More
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