US Federal Reserve Under Fire for Weakening Bank Supervision
The US central bank’s top banking regulator, Michelle Bowman, has defended efforts to revamp oversight of the sector, amid warnings that weakened supervision could destabilize the financial system. Bowman, the Federal Reserve vice chair for supervision, stated that the approach was designed to sharpen focus rather than narrow it.
The New Supervisory Approach
The Federal Reserve released a memo that called on supervisory staff to prioritize attention on a firm’s "material financial risks," rather than focusing too much on processes and documentation that do not pose significant risks to a firm’s safety and soundness. The memo also instructed Fed supervisory staff to rely more on state or federal supervisors and only independently verify if an issue was resolved if a firm’s internal audit was deemed unsatisfactory. According to Bowman, the aim is to build "a more effective supervisory framework."
Concerns Over Weakened Supervision
However, Fed governor Michael Barr has expressed concerns over the new approach, stressing the need for "clear guardrails, underpinned by effective banking supervision." Barr warned that periods of weakened supervision have often preceded episodes of financial excess and instability. He cautioned that the country was at a "moment of inflection," citing rising pressures to weaken supervision "in ways that will make it harder for examiners to act before it is too late to prevent a build-up of excessive risk."
Staffing Cuts
Barr also argued that plans to cut staffing at the Fed’s supervision and regulation division by 30% by the end of 2026 would impair supervisors’ ability to act swiftly and forcefully in responding to risks. These cuts are to take place in Bowman’s division in Washington, reducing headcount from around 500 to about 350 employees. The goal is to accomplish this reduction as much as possible through attrition, retirements, and by offering voluntary separation incentives.
Impact of Weakened Supervision
Barr emphasized the need for sufficient and experienced supervisory staff, stating that it took nearly a decade to build up capacity after the financial crisis showed that Fed supervision had failed to keep pace with the banking system’s growth. He warned that weakening bank supervision could have an impact that is "profoundly damaging to banks and destabilizing to the financial system." Barr stated that "what they’re doing is undermining our ability to hold the banking system accountable and to make sure it stays safe in the future."
Conclusion
In conclusion, the US Federal Reserve’s efforts to revamp oversight of the banking sector have sparked concerns over weakened supervision. While Bowman defends the new approach as a way to sharpen focus, Barr warns that it could lead to financial instability and undermine the banking system’s safety. The debate highlights the importance of effective banking supervision in maintaining a stable financial system, and the need for careful consideration of the potential consequences of weakened supervision.
