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Last week, Federal Reserve Board (“FRB”) Governor
Michelle Bowman gave a speech entitled Financial Stability in Uncertain Times,
focusing on the “financial stability risks and
vulnerabilities” she is most focused on.
Gov. Bowman started her remarks on risk with the banking sector
and that while the banking sector experienced stress this spring
“the events of earlier this year have underscored the strength
and resilience of the overall U.S. banking system.” Gov.
Bowman noted that the interest rate environment does create some
stresses, but noted that all banks subject to this year’s
stress tests passed. Gov. Bowman also noted that commercial real
estate values following the COVID-19 pandemic is a risk the
regulators are watching closely. She also noted that she is
“also closely watching other financial stability
vulnerabilities posed by large nonbank financial institutions”
and risks to the smooth functioning of the U.S. Treasury
markets.
Gov. Bowman went on to note that “not all of the financial
stability risks and vulnerabilities that I have highlighted require
policy changes. In fact, it is possible that an overreaction in
adjusting policies in light of recent stresses could worsen
conditions rather than ameliorate them.” She went on to note
that there’s a proper balance between supervision of individual
institutions and regulation of the entire banking section and that
“bank supervision cannot simply rely on pinpointing compliance
issues, failed processes, or rule violations. It must go further to
examine a bank’s risk exposures while prioritizing core safety
and soundness issues in the context of the bank’s financial
condition.” In terms of that balance, Gov. Bowman said
“[t]he vast majority of improvements to supervisory functions
could be accomplished without broad changes to the regulatory
framework.”
Gov. Bowman cautioned policymakers to “carefully consider
whether the contemplated significant increases in capital
requirements in the United States related to the finalization of
Basel III capital standards meet [the] standard for being efficient
and appropriately targeted.”
These comments from Gov. Bowman seem to suggest she continues to
be skeptical of the Basel III Endgame proposal in which she dissented, and suggests a strong preference
for tailored supervision rather than a wholesale regulatory
approach to promote financial stability.
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