Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Well, good morning to you and to everyone around the
Speaker 2: world who's watching and listening on Bloomberg television and radio.
Speaker 2: I am with Michelle Bowman. She is the Vice Chairman
Speaker 2: for Supervision at the Federal Reserve Board, and we thank
Speaker 2: you for joining us here. Most people know Michelle Bowman
Speaker 2: lately as one of the dissenters at the last meeting.
Speaker 2: You talked last weekend about the fact that you haven't
Speaker 2: really changed your views, So there's not much to add
Speaker 2: in that.
Speaker 3: I guess yep. The story's out there and I haven't
Speaker 3: changed my views.
Speaker 2: Well, the real reason we wanted to talk to you,
Speaker 2: of course, is because of your regulatory job. First, can
Speaker 2: you give us a little feel for how it fits
Speaker 2: into the overall FED structure. I think most people, unless
Speaker 2: you're in banking, pay much more attention to the monetary
Speaker 2: policy activity.
Speaker 1: So the role for visor for supervision was in the
Speaker 1: Dodd Frank Statute after the financial crisis of the odds,
Speaker 1: and I'm the third person to serve in this role.
Speaker 1: And so we're moving forward with a number of different
Speaker 1: opportunities and we overseid this person in this chair oversees
Speaker 1: the supervision and regulation of the banking system essentially, And
Speaker 1: here you're.
Speaker 2: Going to be talking to the blockchain conference about dbanking.
Speaker 2: How big a problem is that?
Speaker 1: Well, I think it's important to understand that the President
Speaker 1: issued in executive order because it is a problem in
Speaker 1: the banking system. And one of the first things that
Speaker 1: I did in assuming this role was to rescind all
Speaker 1: of our guidance and to change our supervisory materials that
Speaker 1: referenced reputational risks so that we could ensure that the
Speaker 1: Federal Reserve is no longer including that in our examinations
Speaker 1: or in our supervisory activities. To ensure that the banks
Speaker 1: that banks can have as customers anyone that they choose
Speaker 1: to that's engaged in legal activity, and they can't discriminate
Speaker 1: against them based on their business model, their political views,
Speaker 1: or otherwise.
Speaker 2: Well, is that a widespread issue? I mean, how do
Speaker 2: you stamp it out?
Speaker 3: Well?
Speaker 1: I think it's difficult because all of that happens under
Speaker 1: the cloak of confidential supervisory information. But as long as
Speaker 1: our examination teams and our policymakers are focusing on ensuring
Speaker 1: that reputational risk and debanking is not a part of
Speaker 1: the banking system going forward.
Speaker 3: Then I think that's the way that we'll work to
Speaker 3: achieve that.
Speaker 1: I also spend a lot of time speaking with bankers
Speaker 1: and with people within the economy, so hopefully if it
Speaker 1: is happening, someone will let me know and we can
Speaker 1: try to address it.
Speaker 3: If we hear about it again.
Speaker 2: Well, there are some areas. Obviously you talk about legalities,
Speaker 2: and the question of whether marijuana can dealers can be
Speaker 2: banked or not is kind of a difficult one. But
Speaker 2: you have something like the crypto industry where reputational risk
Speaker 2: might come in and you've had a lot of failures there,
Speaker 2: So what do you tell your bank examiners.
Speaker 1: So what we're doing now is we've disbanded our Novel
Speaker 1: Supervision Group, So it was created two years ago to
Speaker 1: focus on these kinds of activities, innovation and the integration
Speaker 1: of digital assets into the banking system. So what we're
Speaker 1: doing is we're taking the learnings that we had from
Speaker 1: that group and we're integrating it back into our reserve
Speaker 1: bank examination teams so that they understand that, as Congress
Speaker 1: overwhelmingly supported the passage of the Genius Act, these are
Speaker 1: very very acceptable activities and they're of course legal, because
Speaker 1: we're working on developing frameworks that will allow for digital
Speaker 1: assets to exist both inside and outside the banking system
Speaker 1: in a way that is unquestionably allowable activity.
Speaker 2: There are also complaints Elizabeth Warren has made some that
Speaker 2: banks might have locked out customers because of overdraft fees
Speaker 2: or religious affiliation, political beliefs. Are you adjusting those as well?
Speaker 1: Well, that's all a part of the President's executive order
Speaker 1: and certainly will be included in any debanking oversight that
Speaker 1: we might do. Is to ensure that anyone who's entitled
Speaker 1: or eligible for a banking account will have access to
Speaker 1: banking services.
Speaker 2: Now, I know you're moving forward on the enhanced supplementary
Speaker 2: leverage ratio, but have you decided yet on a final rule.
Speaker 1: Well, we've published an initial That was one of the
Speaker 1: first things that I did as the vice chair for
Speaker 1: Supervision was to work with my interagency colleagues to publish
Speaker 1: and put forward this proposal on the supplemental leverage ratio.
Speaker 1: That's just one component of our capital framework, though, and
Speaker 1: we're working on all four pillars of that framework, with
Speaker 1: the stressed capital Buffer, the Jesup surcharge, the basil three proposal,
Speaker 1: and then the supplemental leverage ratio proposal as well.
Speaker 2: Well. I guess my question gets to the timing of
Speaker 2: when it might come into effect.
Speaker 1: So we've already published it, waiting for the comment period
Speaker 1: to lapse, and then we'll move forward with finalizing that proposal,
Speaker 1: but hopefully it will be in a comprehensive way with
Speaker 1: the other three pillars of our capital system capital framework,
Speaker 1: so that we understand how each one of them builds
Speaker 1: to the right calibration of capital within the banking system.
Speaker 2: And as set up now, you're looking to carve out
Speaker 2: treasuries and other assets that are risk free or.
Speaker 1: Almost so the way that our proposal works is that
Speaker 1: it doesn't carve out any particular type of asset. So
Speaker 1: the purpose of the way that we've drafted the supplemental
Speaker 1: leverage ratio is to ensure that it works as it
Speaker 1: was intended, which is to be a backstop instead of
Speaker 1: a binding constraint. And what we've found over the past
Speaker 1: few years is that it's served in cases where there's
Speaker 1: been a lot of activity in the treasury markets as
Speaker 1: a binding constraint. So we wanted to make sure that
Speaker 1: banks have the ability to allocate cap in ways that
Speaker 1: are helpful and productive for them, and that we're not
Speaker 1: disincentivizing activities that would allow them to intermediate the treasury
Speaker 1: markets appropriately.
Speaker 2: There's a lot of issues out there, so I want
Speaker 2: to keep moving on through them. Well, we've got you
Speaker 2: to here, Large Financial Institution rating System, the Bank Policy Institute,
Speaker 2: the American Bankers Association behind now your efforts to make
Speaker 2: changes in that. Where is that and what are we
Speaker 2: likely to see?
Speaker 3: So we've published that proposal as well.
Speaker 1: That's just a FED only proposal, but as a part
Speaker 1: of reviewing all of our ratings frameworks, we're also reviewing
Speaker 1: the Camel's framework. So this is just one part of
Speaker 1: an overall effort to make sure that our rating systems
Speaker 1: are rationalized and that they're based and grounded in material
Speaker 1: financial risks, and that they're not overweighting something that may
Speaker 1: not be a material financial risk. They're all important components,
Speaker 1: but we want to make sure that we're not downgrading
Speaker 1: without taking in to account if there are deficiencies in
Speaker 1: material financial conditions. So the large Bank Large Bank Framework
Speaker 1: proposal that we've put forward for the ratings proposal, originally
Speaker 1: it was designed there are three buckets of there's capital, liquidity,
Speaker 1: and then governance and controls.
Speaker 3: The way that it was.
Speaker 1: Initially designed is that a deficiency in any one of
Speaker 1: those three categories would downgrade a bank in its condition.
Speaker 3: So now this.
Speaker 1: Proposal would require two deficiencies in two different buckets, so
Speaker 1: that we're not relying on one that might not be
Speaker 1: a material financial risk to downgrade a bank's condition overall.
Speaker 2: Yet another one that's hanging out there is the Basil
Speaker 2: three implementation.
Speaker 3: Right where are you on that?
Speaker 2: I know that basically the FED is looking to redo
Speaker 2: what had been proposed.
Speaker 1: Well, I think what we're looking at doing is going
Speaker 1: back to the original BOSL agreement from twenty seventeen to
Speaker 1: make sure that we're heeuing closely to what that agreement included.
Speaker 1: We've also seen that every other jurisdiction around the world
Speaker 1: that's subject to the basil requirements has already published their requirements.
Speaker 1: So we want to make sure that we understand what
Speaker 1: those requirements are as we're looking to frame our own proposal.
Speaker 2: What's the timing on that you things?
Speaker 1: So, as we're looking at all four of these pieces
Speaker 1: of capital in a comprehensive way, we want to make
Speaker 1: sure that we have proposals out that help us understand
Speaker 1: how they'll all work together, because we have overlapping, duplicative,
Speaker 1: and sometimes conflicting requirements within the existing capital framework. So
Speaker 1: BASIL three will probably be the last one that we
Speaker 1: propose or repropose, essentially, and we'll hope to have all
Speaker 1: of these initial proposals out early next year.
Speaker 2: Back to where we started with crypto, you're looking at
Speaker 2: new global standards on bank crypto exposures that are supposed
Speaker 2: to come into effect at the beginning of the year.
Speaker 2: What do you anticipate there?
Speaker 1: So those are Internet national standards, and the US is
Speaker 1: taking a different look. Obviously, Congress has spoken on how
Speaker 1: they see permissibility or allowable activity, and we want to
Speaker 1: make sure that what we're doing is appropriate for the
Speaker 1: United States.
Speaker 2: Well, how does the timing fit with the international rules
Speaker 2: coming into effect, timing of what the FED and the
Speaker 2: other regulators in the US want to be telling banks.
Speaker 1: Well, I think I sit on the JIHAS, which is
Speaker 1: the Heads of Supervision Committee for the BASLE, for the
Speaker 1: BASLE Committee, and that these are conversations that will be
Speaker 1: having going forward for the rest of the year.
Speaker 3: And you know, I think time will tell.
Speaker 2: We'll have you back and get the update on that.
Speaker 2: I did want to ask about the way the policy
Speaker 2: system works. We have three regulators in the US, most
Speaker 2: other countries have maybe one, and we shift the people
Speaker 2: in charge of it, as you mentioned here the third
Speaker 2: one here and Michael Barr, your predecessor, had a much
Speaker 2: more comprehensive buzzle three proposal. We're going to have a
Speaker 2: new FED chair in June of next year. Will all
Speaker 2: this change again? Oh?
Speaker 3: I wouldn't think so.
Speaker 1: Obviously, our board has to approve anything that we put
Speaker 1: forward as a regulatory proposal, so anything that we move
Speaker 1: forward will be broadly supported by the members of the
Speaker 1: board that are that are present at that time.
Speaker 2: You've been on a FED for quite a while now
Speaker 2: almost seven years, almost seven years, and now you're in
Speaker 2: the supervisory role that you're really well qualified for.
Speaker 3: Thank you.
Speaker 2: You know you've been mentioned as a potential FED chair,
Speaker 2: But do you prefer this supervising me and regulatory side?
Speaker 1: Well, right now, I'm committed to doing the job that
Speaker 1: I have and we've really hit the ground running with
Speaker 1: our with our requests for information on check fraud and
Speaker 1: other payments fraud with the SLR proposal that we just
Speaker 1: put out, the LFI rating system, we're taking a really
Speaker 1: hard look at our supervisory components and across our reserve
Speaker 1: banks as well as at the board to ensure that
Speaker 1: we're focused on material financial risk.
Speaker 3: So I have a big agenda. We're moving through it quickly.
Speaker 1: Obviously, we need to get the capital proposals completed in
Speaker 1: the near future. But you know, I'm really focused on
Speaker 1: the job that I'm doing, and I'm grateful to the
Speaker 1: President for appointing me and the Senate for confirming me
Speaker 1: to this role.
Speaker 3: So that's what I'm focused on right now.
Speaker 2: Well, sell Republicans on Capitol Hill have suggested that we
Speaker 2: should change this three headed regulatory system and maybe take
Speaker 2: regulation away from the FED. What are you telling them
Speaker 2: and what do you think the odds of something like
Speaker 2: that happening up?
Speaker 1: Well, I think the most important part is to remember
Speaker 1: that we have a banking system that's a dual banking system,
Speaker 1: So we have national banks and we have state chartered banks,
Speaker 1: and the FDIC and the Federal Reserve oversee those state
Speaker 1: chartered banks together with the state banking commissions. So I
Speaker 1: think think it's important that we maintain the ability to
Speaker 1: oversee both the state chartered banks and the occ with
Speaker 1: the national banks, and that we have a rational framework
Speaker 1: that is very similar for all of those banks going forward,
Speaker 1: so there's not arbitrage between the three regulators. But Congress
Speaker 1: is obviously responsible for making any changes to that system,
Speaker 1: so you know, we'll be working closely with them to
Speaker 1: ensure that they understand what we're focused on and what
Speaker 1: we're doing that's supportive of the efforts of all of
Speaker 1: the agencies together.
Speaker 2: So you come out to Jackson, but you also go
Speaker 2: up to Capitol Hill a lot.
Speaker 3: I spent some time on on Capital l Absolutely.
Speaker 2: Nicky Bowman, thank you very much for joining us today,
Speaker 2: the Vice Chair for Supervision at the Federal Reserve Board.
Speaker 2: We're here in Teetan Village, Yoming, and we'll send it
Speaker 2: back to you in New York, all right, Mike McKee,
Speaker 2: thanks very much for that. Bloomberg's Michael McKee and Fed
Speaker 2: Governor Michelle Bowman