US Fed official defends easing of bank oversight as concerns mount

THE US central bank’s top banking regulator on Tuesday defended efforts to revamp oversight of the sector, as she faces warnings that weakened supervision could destabilise the financial system.

“Our supervisory approach is not about narrowing our focus -- it is about sharpening it,” Michelle Bowman, Federal Reserve vice-chair for supervision, said in a statement.

Her comments came after the release of a memo that called on supervisory staff to prioritise 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 called on 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.

The aim, Bowman said, is to build “a more effective supervisory framework.”

Shortly after the Fed released the memo, however, Fed Governor Michael Barr delivered a speech in Washington stressing the need for “clear guardrails, underpinned by effective banking supervision.”

“Periods of weakened supervision have often preceded episodes of financial excess and instability,” added Barr, who is Bowman’s predecessor and an appointee of former president Joe Biden’s administration.

Barr cautioned that the country was at a “moment of inflection,” citing the 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.”

“These pressures present real dangers to the American people,” he said.

‘Gutted’ overnight

Barr also argued that plans to cut staffing at the Fed’s supervision and regulation division by 30 per cent 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, according to an internal email seen by AFP.

The goal is to accomplish this reduction as much as possible through attrition, retirements, and by offering voluntary separation incentives, the email added.

In his speech, Barr emphasized the need for sufficient and experienced supervisory staff.

He said 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.

“Now it is being gutted practically overnight,” he added.

Weakening bank supervision could have an impact that is “profoundly damaging to banks and destabilising to the financial system,” he warned.

“What they’re doing is undermining our ability to hold the banking system accountable and to make sure it stays safe in the future,” Barr said. AFP