The Federal Reserve’s new top banking cop Michelle Bowman said Friday she wants to revisit bank regulations made in the wake of the 2008 financial crisis so that risk is “effectively managed” and lenders can fail without hurting the economy.
In her first remarks since being confirmed this week as the new vice chair of supervision at the central bank, Bowman stressed that while reforms made after the 2008 meltdown were important and essential to ensuring a stronger and more resilient banking system, regulators need to reconsider the unintended consequences that have arisen.
“The task of policymakers and regulators is not to eliminate risk from the banking system, but rather to ensure that risk is appropriately and effectively managed,” she said in a speech at Georgetown University in Washington.
Bowman said the goal is to create and maintain a system that supports safe and sound banking practices with proper risk management.
“Our goal should not be to prevent banks from failing or even eliminate the risk that they will,” she said. “Our goal should be to make banks safe to fail, meaning that they can be allowed to fail without threatening to destabilize the rest of the banking system.”
One of the crisis-era capital measures Bowman wants to redo is the so-called supplemental leverage ratio (SLR), a rule that requires big banks to maintain a preset buffer against their total portfolio of loans and debt. That pile includes large holdings of US Treasurys.
Bankers maintain that asking them to hold capital when they trade against their Treasury investments discourages them from acting as intermediaries in the financial markets, which can contribute to stress when markets become volatile.
Banks are key buyers of US Treasurys and serve as broker-dealers in the Treasury market, helping other investors buy and trade the government bonds.
“When leverage ratios become the binding capital constraint at an excessive level, they can create market distortions,” said Bowman.
Treasury Secretary Scott Bessent hopes a capital rule reset will allow banks to add more Treasurys to their balance sheet, thus giving the flood of supply a fresh incremental buyer.
He also hopes that making things easier for banks will reduce upward pressure on long-term Treasury yields — another key goal for the new administration.
Bowman wants to look at other capital rules, as well. In July, the Fed is set to host a conference to inform central bankers’ understanding of how capital requirements are impacting big banks now and what other changes may need to be made.
She also wants to revise the process of stress testing banks. Famously implemented after the financial crisis, stress tests are designed to measure whether the nation’s largest banks can continue to lend to households during a severe financial and economic crisis without endangering the banking system.
Bowman said the process has raised significant questions and concerns about its effectiveness in identifying systemic weakness. She says the lack of transparency around the models used in stress testing prevents meaningful discussions about how the stress tests can be improved.
The Fed has already undertaken a process to make “comprehensive changes” to its annual stress test for banks this year.
Bowman also wants to tailor regulatory requirements for small and community banks, saying that right now regulators are “pushing down” requirements developed for large banks to regional and community banks.
She proposed creating a separate regulatory framework for community banks to shield smaller banks from larger bank supervision and regulation designed for more complex financial institutions.
She also wants to kick off an internal review of processes used by regulators to pinpoint any outdated, unnecessary, or overly burdensome regulations, eliminate unnecessary regulations, and take other steps to address the regulatory burdens associated with outdated or overly burdensome regulations.
Going forward, Bowman emphasized the Fed will prioritize ensuring bank examiners are properly trained through a challenging course of study and pass rigorous tests before qualifying to become a commissioned bank examiner. The Fed currently does not require all staff involved in supervision and bank examination to have met or to be on a path to meet this credential.
A lack of aggressive supervision was part of the problem that contributed to the downfall of regional lender Silicon Valley Bank in 2023, something Bowman has emphasized.
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