Fed pursuing initiative on how changes in tech, analytics, customer preferences affect supervision

Changes in technology, analytical capabilities, and customer and workforce preferences are spurring an initiative at the Federal Reserve to investigate the implications of those changes for the agency’s supervision function, a governor of the Fed board said Tuesday.

“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,” Fed Gov. Michelle W. Bowman said in a speech to the Community Banking in the 21st Century Research and Policy Conference in St. Louis.

Bowman listed five principles that should guide a new approach to supervision at the agency:

  • Maintain a commitment to preserve the stability, integrity, functionality, and diversity of the banking system.
  • Preserve consumer protection as the Fed innovates and ensures banks can safely offer financial products and services that consumers demand and that are uniquely tailored to their circumstances and goals.
  • Avoid adding, when adjusting the supervisory approach, new burdens on banks, particularly on those that maintain a more traditional business model. “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. “And we need to continue to provide examiners with the ability to tailor their expectations based on the risks posed by individual institutions. We must move even further beyond the ‘one size fits all’ supervisory model that defined our approach in the past.”
  • Enhance transparency around supervisory expectations for safety and soundness and consumer compliance matters and be timelier in feedback to banks. “We must fully leverage our distributed structure to delegate decision making to our Reserve Banks, without diminishing the Board’s important policymaking and oversight role over the supervision of banks,” she said.
  • Ensure the ability to adjust supervisory expectations “effectively and efficiently” as conditions warrant to enable banks to be more flexible in serving their communities and in providing credit to the areas of the economy that most need it.

To follow through on the principles, Bowman said, the Fed will need to consider a variety of things. Those include: changes in the agency’s supervision workforce, processes and technology; the structure of its supervisory activities for all supervised firms; alignment of the agency’s supervisory function; and how innovations in technology (including artificial intelligence) can be best used.

Bowman told the group she will share progress on the initiative, including providing specific examples of how the Fed’s supervisory practices are evolving alongside those of the industry.

Federal Reserve Board Gov. Michelle W. Bowman Creating a New Model for the Future of Supervision