Michelle W Bowman: Tailoring, fidelity to the rule of law, and unintended consequences

Thank you for the invitation to join you this evening at Harvard Law School. It is an honor and a pleasure to speak to this distinguished group. To kick off our conversation, I would like to frame the discussion by offering my views on a key element underpinning the U.S. bank regulatory framework: the role of tailoring. While the principle itself is simple - setting regulatory priorities and allocating supervisory resources in a risk-based way - the consequences of tailoring (or not) can reverberate throughout the banking system, the broader U.S. financial system, and the economy. I see a clear nexus between tailoring and fidelity to the law, including a targeted focus within our statutorily mandated prudential responsibilities.

Tailoring as a Grounding Principle

I have long been a proponent of tailoring and continue to consider it a strong foundational principle upon which to apply bank regulation and supervision. This approach ensures a focus on the most critical risks over time, avoiding the over-allocation of resources or imposition of unnecessary costs on the banking system. When we approach rulemaking with a commitment to tailoring, and to our broader prudential mandates, the public can judge our actions by how well they serve these ends, and they should rightly be concerned when regulatory actions seem to serve other goals. In this sense, tailoring keeps policymakers grounded and facilitates appropriate prioritization. Tailoring also allows us to allocate limited supervisory resources to most effectively support safety and soundness of the banking system and U.S. financial stability.

In accordance with the law, the Federal Reserve, both in its monetary policy function and in the execution of its bank regulatory and supervisory responsibilities, is meant to operate independently and apolitically. But banking regulators have a responsibility to act in a way that proves this independence is warranted. We earn the right to operate with this independence when we consistently follow the law and achieve our prudential objectives. One of the most effective ways we accomplish this goal is through the appropriate prioritization of risks in the financial system. Regardless of the approach to bank regulation and supervision, bank regulators should be subject to oversight and accountability, to both Congress and the public.