Fed Vice-Chair Bowman Aims to Improve Bank Supervision

Newly sworn-in Federal Reserve Board Vice Chair for Supervision Michelle W. Bowman laid out her "pragmatic" agenda to improve bank supervision and regulation. 

In remarks at the Georgetown Business School, Ms. Bowman called for, among other things: (i) changes to the supervisory ratings process; (ii) a recalibration of the enhanced supplementary leverage ratio; (iii) a review of burdensome rules and information collections; and (iv) streamlining banking applications. 

Supervision. Ms. Bowman called for changes to the supervisory ratings process to better reflect actual financial condition. Citing data from the first half of 2024, she reported that two-thirds of the largest institutions were rated unsatisfactory despite meeting expectations for capital and liquidity. She committed to revising the Large Financial Institution ratings framework to ensure a more balanced and accurate assessment of management quality and risk resilience. She called for a review of the CAMELS framework (the international system for rating financial institutions) as it is applied to smaller institutions, emphasizing that supervisory judgment must be grounded in material financial risk.

She also warned against an overemphasis on process-based supervision at the expense of core financial risk identification and urged greater transparency and discipline in the use of horizontal reviews and supervisory guidance. Ms. Bowman reiterated her longstanding support for tailored supervision, especially for community and regional banks, and announced plans to host a conference later this year on improving the regulatory framework for small banks.

Capital. Ms. Bowman cautioned against the piecemeal calibration of capital requirements, which can distort market outcomes and banking activities. She pointed to the enhanced supplementary leverage ratio ("eSLR") as an example of a well-intentioned rule that has become excessively binding, discouraging low-risk activities such as Treasury market intermediation. A proposal to recalibrate the eSLR is forthcoming. She also previewed a Federal Reserve conference this July that will take a broader look at whether the capital framework, as a whole, is well-calibrated to support safety and soundness without unnecessarily discouraging beneficial banking activity. (Topics to be explored include leverage ratios, stress testing reforms, GSIB surcharges, and the Basel III framework, as well as capital standards for community and mutual banks.)

Review of Regulations and Information Collections. Ms. Bowman emphasized that, more than a decade after the post-crisis regulatory reforms, it is time to reassess whether existing rules remain fit for purpose. Some regulations, she noted, may have unintentionally driven foundational banking activity outside the regulated system. She stressed that the aim should be a banking system that is "safe to fail," not one in which risk is eliminated altogether. Ms. Bowman called for a review of the Economic Growth and Regulatory Paperwork Reduction Act ("EGRPRA") to eliminate outdated or burdensome rules.

Banking Applications. Ms. Bowman identified the need to streamline and clarify the banking applications. She called for clearer standards and more predictable timelines for de novo bank charters and mergers and acquisitions.