Federal Reserve Governor Michelle Bowman has been busy recently, visiting three different states’ banker events and delivering a consistent message. With the rapid changes happening and many federal appointments still to be made, Governor Bowman’s comments may help banks get a sense of what to expect in the near future. Here are some highlights from her remarks.
Tailoring regulation to banks’ size and complexity. Governor Bowman discussed how important it is, particularly to community banks, that requirements be tailored to the size and complexity of the banks they regulate, specifically calling out the new Community Reinvestment Act rules (currently subject to pending litigation) that would have applied the same expectations to banks with asset sizes of $2 billion to $2 trillion.
Effective supervision. It’s clear that Governor Bowman wants to advance a vision of supervision in which regulators accurately identify the key issues worth prioritizing and those issues are addressed by well-trained and experienced examiners. In her comments, she discussed the importance of both effective prioritization of supervisory objectives and the informed, experienced judgment exercised by individual examiners.
Liquidity. While noting that some dynamics in Treasury market functioning may be outside the purview of bank regulators, Gov. Bowman does note that regulators are appropriately situated to analyze and remediate components of bank regulation that may contribute to Treasury market illiquidity.
Stress Testing. This is a topic that the Board has already identified as a priority for review; in December 2024, the Board indicated that it would soon solicit public comments on the process. Governor Bowman expressed a belief that the stress testing process could be made more transparent, fair, reliable, and credible.
Fraud. By every measure, the cost of fraud to banks has increased in recent years. These costs include not only direct losses due to fraud, but also the cost of tools designed to detect and prevent fraud and the costs associated with efforts to remediate fraud. There are additional, more nebulous costs, such as damage to public confidence in the banking system and the curtailment of services offered or used due to the fraud risk associated with certain services. Governor Bowman’s comments mention these concerns and call for “more assertive action to protect bank customers and the financial system.”
New Technology. While clearly stating that innovation originates in the private sector, Governor Bowman recognized that regulators have a role in fostering the development of new technologies to improve the banking system. She emphasized that clear, consistent, and transparent regulatory expectations provide the stability that allows businesses to make long-term investments in innovative technology. When regulatory expectations are unclear or inconsistent, on the other hand, the availability of banking services may be reduced, improvements may be stymied, and uncertainty about regulatory expectations can discourage innovation. Governor Bowman takes the view that regulators must fully understand the risk and benefits of digital assets and distributed ledger technology in order to facilitate reasonable and supportive regulatory approaches while also ensuring the health and safety of the banking system.
While uncertainty remains about many aspects of federal regulation during this transitional period, Governor Bowman’s comments may provide some forecast about regulatory priorities in the near future. We at Compliance Alliance continue to watch for developments to keep our members updated as information becomes available. As always, please reach out to us on the Hotline with any questions or concerns you may have.