The Federal Reserve’s role as supervisor is not to replace a bank’s management and board of directors in adopting a banking strategy and risk appetite, Fed Governor Michelle Bowman said today. In an essay on bank and regulator accountability, Bowman said that it is important that regulators implement the laws that Congress has passed as they are written and not stretch that authority to venture into other areas of policymaking.
“As an example, consider the distinction between making sure institutions are managing all of their material risks and instructing banks to make certain credit allocation decisions by influencing banks to make or not make loans to certain industries,” Bowman writes. “The first objective—the management of material risks—is a central function of a bank supervisor and is fundamental to safety and soundness. But it is equally clear that the second objective—influencing a bank to make certain credit allocation decisions—is not the role of a banking regulator, nor of a central bank.”
The Fed’s supervisory role should be to apply targeted regulation and supervision to assess whether a bank is operating in compliance with applicable laws and in a safe and sound manner, Bowman writes. “This can be a difficult balance to strike but it is something we must always keep in mind whenever the Federal Reserve uses or proposes using its regulatory or supervisory tools. Banking regulation and supervision is not the appropriate method to implement new policies that are not mandated by Congress.”
