Bowman: Regulation must prioritize risks, foster innovation

Federal Reserve Vice Chair for Supervision Michelle W. Bowman outlined four guiding principles for modernizing financial regulation. Speaking in London, Bowman emphasized focusing on material risks, tailoring oversight, enhancing transparency, and fostering responsible innovation.

Four pillars for robust oversight

Vice Chair Bowman detailed the Financial Stability Board's (FSB) work on global regulatory modernization, guided by four key principles.

First, supervisors must prioritize material financial risks, learning from past failures like Silicon Valley Bank where a focus on numerous findings did not translate to effective oversight.

Second, regulation and supervision must be tailored to each institution's unique risk profile, avoiding a one-size-fits-all approach that burdens simpler banks.

Third, transparency and accountability are crucial, ensuring clear expectations for regulated firms and the public.

Finally, modernization must be forward-looking, supporting responsible innovation while addressing emerging risks, particularly from rapidly evolving technologies like artificial intelligence.

These principles aim to ensure the framework remains effective, efficient, and promotes financial stability and sustainable economic growth.

US reforms in practice

The United States applies these principles through several key reforms.

The 2026 Basel III proposal aims to simplify capital requirements, recalibrate the G-SIB surcharge, and reduce overlaps between stress testing.

The Federal Reserve also enhanced transparency by publishing Supervisory Operating Principles, clarifying its focus on early detection of material risks.

Efforts are underway to update outdated fixed asset thresholds by indexing them to economic growth, addressing increasing regulatory burden.

Furthermore, the US supports safe adoption of emerging technologies, with the FSB recently publishing a consultation on AI sound practices, open for public comment through July 22.

Targeted, not exhaustive

Bowman's speech provides a clear roadmap for regulatory reform, emphasizing effectiveness over sheer volume of rules.

The focus on proportionality and risk-based approaches is a pragmatic response to past supervisory shortcomings.

However, the challenge lies in implementing these principles consistently across diverse institutions without diluting essential safeguards.