Gabrielle Saulsbery
4 min read
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Michelle Bowman is a veteran of the Federal Reserve. But the ink on her newest role – the Fed’s vice chair for supervision – is still drying. Following her confirmation, she spoke Friday at Georgetown University in her first appearance as the central bank’s top cop. Here are six takeaways from her remarks.
1. The Fed’s job is not to take the risk out of banking entirely.
Banking is not and cannot be devoid of risk, and to drive out such risk “is at odds with the fundamental nature of the business of banking,” Bowman said. “Banks must be able to earn a profit and grow while also managing their risks.”
“Adding requirements that impose more costs must be balanced with whether the new requirements make the correct tradeoffs between safety and soundness and enabling banks to serve their customers and run their businesses,” she said.
Rather than eliminating risk from the banking system, regulators must be tasked with ensuring banks manage risk effectively, Bowman said.
2. ...or make sure banks don’t fail.
“Our goal should not be to prevent banks from failing or even eliminate the risk that they will,” Bowman 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.”
3. Enhancing supervision doesn’t necessarily mean more rules; it means tailored rules.
“Supervision focused on material financial risks that threaten a bank's safety and soundness is inherently more effective and efficient,” Bowman said. “We should be cautious about the temptation to overemphasize or become distracted by relatively less important procedural and documentation shortcomings.”
The uniqueness of each bank, in business model and complexity, means that risks are not uniform. In the past, Bowman said, rules meant to enhance safety at the biggest banks have also been unfairly applied to smaller banks. She suggested creating a framework instead for those smaller community banks, which would insulate them from the standards designed for bigger, more complex institutions.
“While I have no objection to a deliberate, intentional policy to apply similar standards to firms with similar characteristics as conditions warrant, the 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,” Bowman said.
