What You Missed from the Fed's Financial Regulation Testimony

Last week, Federal Reserve Vice Chair for Supervision Michelle Bowman testified before the House Financial Services Committee alongside the leaders of other regulatory agencies about the core issues facing financial regulation today.

To recap:

The banking system is strong, secure, and well-positioned to support economic growth.

• "The banking system remains sound and resilient. Banks continue to report strong capital ratios and significant liquidity buffers, which position them well to support economic growth. The banking sector demonstrates strong health through sustained lending growth and robust profitability.”

The new capital proposals take steps to fortify mortgage availability by addressing the disincentives that had restricted banks' ability to lend to homebuyers.

• "Importantly, the proposals encourage responsible mortgage lending in the banking system by reducing disincentives for these activities. Since 2008, the share of bank-originated mortgages has declined significantly—from about 60 percent to around 35 percent in 2023. Over the same period, the share of mortgage servicing conducted by banks declined 50 percent. Because mortgage origination and servicing are a critical part of the customer relationships that underpin the community bank business model, appropriately calibrating risk weighting for these activities will encourage community banks to return to providing these foundational services.

Advancing AI technology enables accelerated threat identification and highlights new vulnerabilities.

• "Recent advances in frontier AI models have dramatically accelerated the identification of cyber vulnerabilities across critical infrastructure, including the banking system. While this enhanced detection capability offers opportunities to strengthen cybersecurity defenses, it also identifies new vulnerabilities to potential cyberattacks."

The Federal Reserve is working to reduce supervisory sprawl by ensuring that attention is focused on material risk.

• "Our supervision focuses on material risks to a bank's financial condition and its overall strength. As part of this effort, staff conducted a comprehensive review of all outstanding matters requiring attention (MRAs). The findings revealed that many previous MRAs cited procedural or documentation deficiencies rather than threats to safety and soundness. Others applied best practices from the largest, most complex banks across institutions with very different business models and risk profiles. This approach diverted bank and examiner attention away from material financial risks and inherently discouraged innovation."

From right-sizing capital rules to improving bank supervision, federal regulators and the financial services industry are working to make positive steps towards a modernized and robust financial ecosystem. As these improvements unfold in the months ahead, The Ledger Project will continue to provide the facts that matter, championing a financial system grounded in stability, transparency, and trust.

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