Fed Governor Bowman Makes the Case for Bank Regulatory Reform

Federal Reserve Board Governor Michelle W. Bowman identified key problems in the current regulatory framework, including inadequate tailoring of rules for smaller banks, liquidity challenges in the US Treasury market, stress testing inefficiencies and hostility toward financial innovation.

During a speech titled Bank Regulation in 2025 and Beyond before the Kansas Bankers Association Government Relations Conference, Ms. Bowman highlighted the following: 

On Tailoring.

Ms. Bowman stressed the use of "tailoring" in the regulatory framework—"calibrating the requirements and expectations imposed on a firm based on its size, business model, risk profile, and complexity." She questioned the "wisdom of applying the same evaluation standards to banks" with assets ranging from $2 billion to $2 trillion under the new Community Reinvestment Act rules, calling it a "missed opportunity to promote greater effectiveness and efficiency." On community banks, Ms. Bowman stressed that excessive regulatory burdens can force them to "raise prices or seek to merge or be acquired."

On Problem-Based Solutions.

Ms. Bowman advocated for a "pragmatic approach to policymaking," which involves first identifying the problem, determining whether the regulator has the appropriate authority to address it and then exploring potential solutions. 

Ms. Bowman pointed out that supervisory responsibility within the Federal Reserve is divided between the Board and Reserve Bank staff, which can create a "misalignment of responsibility and accountability" that undermines effective supervision. She called for "strong examiner training" and a supervisory approach that "rel[ies] on examiner expertise in the conduct of examinations" while working in partnership with state bank supervisors. She warned examinations "cannot be just a box-checking exercise." Instead, examiners must be "empowered to exercise independent judgment and ask questions," which she argued leads to "stronger and more effective supervision."

On Treasury Market Functioning.

Ms. Bowman highlighted how leverage-based capital requirements have become "the binding capital constraint on some large banks." She noted that low liquidity in Treasury markets has been a persistent issue, as documented in the Federal Reserve's Financial Stability Report. While measures such as the SEC's central clearing requirement and the Fed's Standing Repo Facility could help, she emphasized ongoing uncertainty regarding "how the volume of Treasury securities issued and outstanding, and changes to the Fed's balance sheet over time, may affect this."

She stressed the need to "actively monitor indicators of market function" to determine whether market conditions are improving and can "withstand future shocks."

On Stress Testing. 

Ms. Bowman emphasized the need to review the Fed's stress testing framework, calling it "an opaque test hidden from public scrutiny." She welcomed the Fed's recent announcement that it would seek public comment on "significant changes" to improve transparency and reduce volatility in stress capital buffers for large banks.

On Innovation. 

Ms. Bowman emphasized the need for "clear and sensible regulatory framework" that allows the private sector to innovate while maintaining appropriate safeguards. She warned that without clear rules, regulatory uncertainty could "reduc[e] the availability of banking services" and lead to "de-banking" or "de-risking," where access to banking is limited for legitimate businesses.

She criticized the regulatory tendency to take a "'more is better' approach," noting that the banking industry faced "an onslaught of proposed and final regulations and guidance" that often lack transparency and appear "overly hostile to innovation." She urged regulators to "prioritize understanding the risks and benefits of new technologies" before imposing supervisory restrictions, cautioning that an excessive focus on safety and soundness could "stifle innovation and threaten the long-term health and utility of the banking system."