Fed’s Bowman: Capital requirements ‘no substitute’ for strong supervision

Policymakers should carefully consider whether a proposed increase in capital standards is efficient and appropriately targeted, as regulatory reform in the banking sector can pose potential financial stability risks if the reforms in question fail to account for the potential consequences, Federal Reserve Governor Michelle Bowman said yesterday during an economic conference in Morocco.

“Regulatory capital requirements, no matter how conservatively calibrated they may be, are simply no substitute for sound risk management and strong, effective, efficient and transparent supervision,” she said. “The vast majority of improvements to supervisory functions could be accomplished without broad changes to the regulatory framework.”

Federal regulators have proposed higher capital standards for banks with more than $100 billion in assets as part of the U.S. implementation of the “Basel III endgame.” In her speech, Bowman said that policymakers need to ensure that changes to the regulatory framework do not harm the long-term viability of banks, especially midsize and smaller banks. “In my view, regulatory reform can pose significant financial stability risks, particularly if those changes to regulation fail to take sufficient account of the incentive effects and potential consequences,” she said.