Fed Vice Chair for Supervision Michelle Bowman: Very important that we maintain our independence

Key Concepts:

• Dodd-Frank regulations
• Basel III
• GSIB surcharge
• Stress test regulations
• Interagency agreement
• Fed independence
• Monetary policy
• Large bank rating framework
• Financial stability
• Banking perimeter
• Risk weightings

I. Review of Post-Financial Crisis Regulations

• Main Point: After 15 years since the financial crisis and the implementation of Dodd-Frank, the Federal Reserve is reviewing the effectiveness, redundancies, and overlaps in existing regulations, particularly capital regulations for large banks.
• Details: The goal is to create a more rational, less duplicative, and less overlapping framework for banks to comply with capital requirements.
• Rationale: The review aims to understand what has been working and what hasn't, leading to a more comprehensive approach to capital regulations.

II. Pending Regulations and Recalibration

• Main Point: The Fed is actively working on several pending regulations, including Basel III, a GSIB surcharge proposal, and improvements to stress test regulations.
• Details: These regulations are being reviewed in context to ensure they work together effectively, considering the overlap and interaction between them.
• Process: The Fed aims to understand the expectations of each regulation and recalibrate them to achieve the right level of capital for the system as a whole.

III. Consensus and Interagency Cooperation

• Main Point: The Fed is working closely with other agencies to achieve consensus on regulatory changes, as many rules require interagency agreement.
• Details: There is broad consensus within the board on some of the changes being made.

IV. Addressing Concerns About Deregulation

• Main Point: The Fed's approach is not considered deregulation but rather ensuring the regulatory framework is appropriate for the current state of the system.
• Argument: Capital and liquidity levels in the system have more than doubled since the 2010s, making it the right time to improve the framework, enhance transparency, and promote better interaction.
• Counterpoint: Concerns about weakening regulation leading to increased risk-taking and bank fragility during boom times are acknowledged but addressed by emphasizing the current strength of the system.
• Quote: "Weakening regulation often drives risk taking and increases bank fragility during the boom, meaning kind of the boom times making the ensuing bust more painful." - Michael Barr

V. Fed Independence and Accountability

• Main Point: Maintaining independence with respect to monetary policy is crucial, along with transparency and accountability.
• Details: The Fed is obligated to listen to a broad range of voices and understand how others view the economy to inform monetary policy decisions.

VI. Reforming the Large Bank Rating Framework

• Main Point: Changes were made to the large bank rating framework in 2018 to balance the impact of non-financial factors on a bank's overall rating.
• Details: The previous framework allowed non-financial factors alone to degrade a bank's financial standing, which was deemed inappropriate.
• Process: The revised framework requires a downgrade in liquidity or capital components in addition to the GNC rating system.
• Example: The issues with Silicon Valley Bank highlighted the importance of focusing on financial-related factors when assessing a bank's condition.

VII. Regulation of Non-Bank Financial Sector

• Main Point: There is a discussion about whether the non-bank financial sector, including private credit and direct lending, warrants more scrutiny.
• Perspective: Expanding the banking perimeter to allow banks to engage in traditional banking activities like mortgages and mortgage servicing is considered a better outcome.
• Rationale: The risk weightings in the capital framework may need adjustment to reflect the risks associated with these activities.

VIII. Conclusion

The Federal Reserve is actively engaged in reviewing and recalibrating its regulatory framework for large banks, focusing on capital regulations, stress tests, and the interaction between different rules. The goal is to create a more efficient, transparent, and effective system that promotes financial stability while allowing banks to engage in traditional banking activities. The Fed emphasizes the importance of interagency cooperation, maintaining independence, and considering a broad range of perspectives in its decision-making process.