Fed's Bowman Outlines Four Principles for Improving Bank Regulation and Supervision
Commentary by Steven Lofchie
Federal Reserve Vice Chair for Supervision Michelle Bowman set out her four principles for improving bank regulation and supervision. She also provided examples of how the Federal Reserve Board was putting these principles into practice.
Ms. Bowman announced at the Bank Policy Institute's London conference that the Financial Stability Board ("FSB") is developing principles to guide global regulatory and supervisory change, noting that she had led that work on this task at the FSB for about a year.
The four principles are as follows:
- Supervisors should focus on material financial risks, those that can threaten a firm's viability and stability.
- Regulation and supervision should be tailored to each firm's risk profile; applying complex-firm standards to simple firms adds burden without benefit.
- Supervisory expectations should be transparent and should not surprise firms.
- Regulation should be forward-looking, address emerging risks, and support responsible innovation without being overly prescriptive.
Ms. Bowman announced that the FSB will publish a report for public consultation in the fall and deliver it to the G20.
On the steps the FRB has taken to implement these principles, Ms. Bowman pointed to the following:
- The FRB's 2026 Basel III proposal, which would: (i) move large banks to a single stack of risk-based capital requirements, (ii) recalibrate the surcharge for the global systemically important banks ("G-SIB") to better reflect systemic risk, (iii) cut overlaps between stress testing and risk-based rules, (iv) right-size requirements to keep traditional banking from moving outside the regulated sector, and (v) index the G-SIB surcharge to nominal economic growth.
- The publication of the Statement of Supervisory Operating Principles, which focuses on early detection of material risks.
- The FRB's effort to index fixed dollar thresholds so they rise over time.
- The FRB's redefinition of minor weaknesses. Ms. Bowman noted that matters that raise concern but fall short of a violation may be cited as "supervisory observations."
- The FSB's consultation report last month on sound practices for banks using artificial intelligence. Ms. Bowman noted it offers practical guidance rather than one-size-fits-all rules. Comments on that report are due by July 22, 2026.
Commentary
Interesting that the global regulators would have signed off on focusing on "material financial risks." That would seem to mean, reading without too much difficulty between the lines, Ms. Bowman believes that financial regulatory resources have been excessively devoted to worries about climate change rather than, for example, liquidity risk.
On somewhat of a side note, it is useful to recognize that over-regulation is not just about regulations that are too burdensome. It is also about regulations that are disorganized, messy, and chaotic, what Michael Hsu, the former acting Comptroller of the OCC, refers to as "policy sludge."