Fed Vice Chair Highlights "Pragmatic" Supervisory Reforms and Material Risk Focus

Federal Reserve Vice Chair for Supervision Michelle W. Bowman described the implementation of her "comprehensive approach to pragmatic supervision and regulation" of the U.S. banking system.

In remarks at the California Bankers Association Bank Presidents Seminar, Ms. Bowman emphasized that supervision has been refocused on the "early detection and remediation of material financial risks," moving away from "subjective, politicized, or tangential issues" that divert attention from core safety and soundness. She said that the framework ensures the banking system remains efficient and innovative, particularly for community banks. 

Ms. Bowman highlighted the Fed's recently published supervisory operating principles and its elimination of the use of "reputational risk" in the supervisory process. She also noted the rescission of climate guidance that "diverted ... resources" from core risks. Regarding capital requirements, Ms. Bowman stated the Fed has proposed recalibrating the Community Bank Leverage Ratio from nine percent to eight percent and is modifying the enhanced supplementary leverage ratio to support Treasury market stability.

Ms. Bowman also discussed future reforms, including defining "unsafe and unsound" practices and updating outdated asset thresholds. She argued that fixed thresholds, such as the $10 billion definition for community banks, should be indexed to nominal GDP to account for economic growth and inflation. In addition, she referenced changes to the Large Financial Institution ratings framework to ensure a firm's "well-managed" status reflects its overall risk profile rather than being disproportionately weighted by a single component.