Bowman's goal as new top Fed banking cop: Make US lenders 'safe to fail'
The Federal Reserve’s new top banking cop Michelle Bowman said Friday she wants to revisit bank regulations made in the wake of the 2008 financial crisis so that risk is “effectively managed” and lenders can fail without hurting the economy.
In her first remarks since being confirmed this week as the new vice chair of supervision at the central bank, Bowman stressed that while reforms made after the 2008 meltdown were important and essential to ensuring a stronger and more resilient banking system, regulators need to reconsider the unintended consequences that have arisen.
"The task of policymakers and regulators is not to eliminate risk from the banking system, but rather to ensure that risk is appropriately and effectively managed,” she said in a speech at Georgetown University in Washington.
Bowman said the goal is to create and maintain a system that supports safe and sound banking practices with proper risk management.
“Our goal should not be to prevent banks from failing or even eliminate the risk that they will,” she said. “Our goal should be to make banks safe to fail, meaning that they can be allowed to fail without threatening to destabilize the rest of the banking system.”
One of the crisis-era capital measures Bowman wants to redo is the so-called supplemental leverage ratio (SLR), a rule that requires big banks to maintain a preset buffer against their total portfolio of loans and debt. That pile includes large holdings of US Treasurys.
Bankers maintain that asking them to hold capital when they trade against their Treasury investments discourages them from acting as intermediaries in the financial markets, which can contribute to stress when markets become volatile.
Banks are key buyers of US Treasurys and serve as broker-dealers in the Treasury market, helping other investors buy and trade the government bonds.
“When leverage ratios become the binding capital constraint at an excessive level, they can create market distortions,” said Bowman.
Treasury Secretary Scott Bessent hopes a capital rule reset will allow banks to add more Treasurys to their balance sheet, thus giving the flood of supply a fresh incremental buyer.
He also hopes that making things easier for banks will reduce upward pressure on long-term Treasury yields — another key goal for the new administration.
Bowman wants to look at other capital rules, as well. In July, the Fed is set to host a conference to inform central bankers’ understanding of how capital requirements are impacting big banks now and what other changes may need to be made.
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