The Federal Reserve’s regulations and supervisory process require significant “maintenance” to meet the Fed’s statutory mandate on safe and sound banking, Fed Governor Michelle Bowman said today. In a major speech at ABA’s Conference for Community Bankers in Phoenix—coming as current Fed Vice Chair for Supervision Michael Barr is stepping down from that post at the end of the month—Bowman laid out her vision for a revamp of the Fed’s supervisory and regulatory system.
Supervisory and regulatory ‘system maintenance’
On supervision, she warned that there is an “odd mismatch” between the financial condition of large banks and the supervisory rating they received, asking “whether subjective examiner judgment—those evaluations based on subjective, examiner-driven, non-financial concerns—is driving the firm’s overall rating.” Bowman argued that Fed supervision may have “de-prioritized” core financial risks and “over-emphasized” non-financial risks like IT, operational risk, internal controls and governance—a shift she noted that been observed in supervision of banks of all sizes.
“We should also be vigilant and deliberate about any shift in supervisory focus from financial risk toward non-financial risks and internal processes, as this shift is not focused on fundamental safety and soundness issues and it is not cost-free,” Bowman explained.
Bowman attributed part of this shift in supervision to a system of diffuse accountability for supervisors across the Fed Board of Governors and the regional Fed banks. “Responsibility for supervisory decisions must be coupled with accountability for these decisions,” she said. “The misalignment of responsibility and accountability limits our ability to conduct effective supervision.” Supervisors must also rely less on opaque expectations that allow them to rely “heavily on discretion and judgment with far lower standards for justifying action.”
Bowman called on the Fed to seize opportunities to maintain the regulatory framework. One opportunity—the decennial Economic Growth and Regulatory Paperwork Reduction Act review, currently in progress—has been “underwhelming,” she said, but she expects regulators to be “responsive to concerns raised by the public” during this round.
Improving the application process
Bowman called for updates to the Fed’s approach to evaluating merger and acquisition applications, which she said does not consider a wide enough range of options. She said that the Fed often analyzes only two potential scenarios—both banks remain standalone entities or two banks merge—while ignoring options like acquisition by a credit union or the alternative that a bank may either close or leave a market due to non-viability.
“This analytical approach to evaluating competition no longer remains appropriate, and it needs to be reformed to better reflect actual market realities,” she said. “This must include competition from credit unions, the Farm Credit System, internet banks, financial technology firms and other nonbanks.”
De novo bank applications are stagnant, but that does not necessarily mean that investors do not want to form new banks, Bowman said, noting demand for banking as a service partnerships and so-called “charter strip” acquisitions. “We should consider whether the applications process itself has become an unnecessary impediment to de novo formation,” she said. “As fewer applications come in, institutional muscle memory for how to deal with new bank charters erodes, and it becomes difficult to navigate and ultimately to overcome institutional inertia.”
Since de novos are handled at the reserve bank level but staff have little recent experience with new bank applications, Bowman recommended creating a “specialized resource” at the Board of Governors to assist them in reviewing applications and to help the Fed coordinate and streamline the process with other regulatory authorities.
“Reform of the de novo applications process should not be thought of as a deregulatory exercise. . . . At the same time, if we want to encourage a pipeline of de novo bank formations, we should also be comfortable with the uncertainty that accompanies any new business, including the risk that some de novo banks will not succeed,” Bowman said. “The cost of eliminating the failure of de novo banks—or really of any banks at any time—is simply too great.”
Monetary policy outlook
Bowman—who dissented from a Federal Open Market Committee decision in September 2024 to reduce the fed funds rate target range—said she now believes the monetary policy rate is in “a good place” aligned with economic data. She said she expects inflation to slow further in 2025 but that she “continues to see greater risks to price stability, especially while the labor market remains strong.”
She also warned that the elevated equity prices over 2024 generated easier financial conditions that “may have slowed progress on disinflation” and said she wants to review additional data to “gain greater confidence that progress in lowering inflation will continue” as the FOMC convenes for its next meeting in March.
