The Federal Reserve is embarking on an initiative that will look at ways to modernize bank supervision as fintech innovation heats up and banking business models evolve, Fed Gov. Michelle Bowman said.
The former community banker and Kansas state regulator said the central bank is conducting an internal review that will look at its existing supervisory practices to determine if its approaches need to change.
Bowman's remarks earlier this week, prepared for a community banking conference, suggest the Fed is focused on ensuring that supervision evolves with rapid changes in the financial system. She also cited banks' response to competition from fintechs and increased use of data analytics in how products are delivered to consumers among the issues prompting the review.
"We need to look ahead and make sure that we're adjusting our supervisory model in ways that allow banks greater flexibility to innovate to compete in today's quickly evolving banking environment — without sacrificing important consumer protections or the health and safety of our banking system," Bowman said in
“We must be consistent in how we view similar activities at similar institutions, but our approach must also allow for de novo banks and allow for greater innovation at our nation's banks,” she said.
Bowman's speech titled, "Creating a New Model for the Future of Supervision," provided few details beyond the announcement of the in-depth internal review of how all banks are supervised. The Fed's board of governors sets the rules for supervision. The 12 Federal Reserve banks employ examiners that have wide discretion to supervise banks for safety and soundness issues.
Bowman's speech echoed
Work on the internal review will take place in 2022. The initiative will include an analysis of lessons learned in supervising banks during the pandemic when the Fed paused on-site exams and shifted to remote monitoring.
The central bank wants to make sure that supervision can foster innovation and fair competition.
“The goal of this initiative is to ensure our supervisory approaches accommodate a much broader range of activities while ensuring we don't create an unlevel playing field with unfair advantages, or unfair disadvantages, for some types of firms versus others,” Bowman said. “This will include investigating technology and innovative business practices that increase our agility and efficiency.”
Bowman, who at one time served as vice president of Farmers & Drovers Bank in Council Grove, Kansas, said she has spoken with more than 650 community banks to glean insights into their regional markets and customers "at a very deep level." She raised several questions that she said the Fed will consider as it looks at its internal processes.
The Fed wants to ensure it understands changing risks while still examining for safety and soundness in banks' consumer practices, she said.
“How should the Federal Reserve structure its supervisory activities across its portfolios of supervised firms?” she said. “Where are we aligned across the supervision function in conducting our work?”
The pandemic has given the Fed an opportunity to see how the banking system operates under times of stress.
“The lessons we learned over the past 18 months ... offer important lessons on how we can appropriately evolve our supervisory approaches,” Bowman said.
