Bowman details Fed's supervisory and regulatory work

Federal Reserve Vice Chair for Supervision Michelle W Bowman outlined the central bank's supervisory and regulatory activities before the US House of Representatives. Her testimony covered banking conditions, recent reforms, and the path forward for financial stability.

Non-banks and AI reshape financial landscape

The US banking system remains sound and resilient, characterized by strong capital ratios, significant liquidity buffers, sustained lending growth, and robust profitability.

However, non-bank financial institutions (NBFIs) are increasingly capturing market share in lending, often without comparable regulatory standards, exemplified by the migration of mortgage origination and servicing.

Banks have tightened lending standards for NBFIs due to concerns about underwriting and collateral quality.

Furthermore, technological advances, particularly in artificial intelligence (AI), present both opportunities and risks.

While frontier AI models accelerate the identification of cyber vulnerabilities, they also expose new threats.

The Federal Reserve is committed to supporting cybersecurity efforts and collaborating with public and private entities to manage these evolving cyber risks through continuous monitoring and agile regulatory frameworks.

Modernizing capital and supervision

Since her last appearance, Vice Chair Bowman highlighted substantial progress in modernizing the regulatory and supervisory framework.

Reforms to the community bank leverage ratio (CBLR) framework now allow a broader range of qualifying banks to use a simpler 8 percent leverage ratio for capital adequacy, with an extended grace period.

Beyond the CBLR, federal banking agencies published proposals in March to modernize the US regulatory capital framework for both large and smaller banks, aiming to clarify requirements, align them with actual risks, and reduce overlaps.

These proposals also encourage responsible mortgage lending by reducing disincentives, addressing a significant decline in bank-originated and serviced mortgages since 2008.

Supervision improvements include advancing risk-based tailoring, a comprehensive review of outstanding matters requiring attention (MRAs) to prioritize material financial risks, and proposed revisions to the CAMELS rating framework for clearer, more objective metrics.

Tailoring for the future, not the past

The ongoing efforts to calibrate regulatory and supervisory thresholds are long overdue, as outdated rules hinder economic growth and innovation.

By failing to adjust for inflation, these thresholds inadvertently burden smaller, low-risk banks with requirements designed for much larger institutions.

This review, including for Regulation O, is crucial for preserving community banking and fostering responsible innovation, particularly in AI and stablecoins.

The focus on practical adjustments rather than broad overhauls suggests a pragmatic approach, but its true impact will depend on the speed and scope of implementation across diverse financial sectors.