According to Financial Times News, Federal Reserve Vice-Chair Michelle Bowman is cutting the central bank’s supervision and regulation division staff by roughly 30%. This follows her long-standing advocacy for focusing more on financial metrics and less on subjective assessments. Bowman has expressed concern about “troubling trends” toward relying on discretion and judgment in supervision. Earlier this year, she proposed turning the annual stress test into something more like an open-book exam by consulting publicly on scenarios and models. This staffing reduction represents a major shift in how American banking regulation will operate going forward.
The Fundamental Divide
Here’s the thing about bank supervision: there are basically two types of work happening. One side deals with financial measures – capital ratios, liquidity, all the stuff that can be quantified and standardized. The other side looks at squishier things like management quality, risk culture, governance, and whether their IT systems are actually adequate. Both matter, but one is way easier to measure objectively.
Bowman’s philosophy is distinctly American – set clear, transparent rules and let banks figure out how to comply. She’s worried about regulators having too much discretion. In a recent speech, she argued against “relying heavily on discretion and judgment.” And her stress test proposals would make the process more predictable for banks.
Europe’s Taking the Opposite Path
Meanwhile, over at the European Central Bank, Claudia Buch is saying almost the exact opposite. In her speeches, she’s argued that as banking gets more complex, boiling everything down to financial metrics becomes increasingly difficult. She wants supervisors to focus more on “resilience” and pay closer attention to banks’ capabilities and governance.
Buch’s approach isn’t just theoretical – she’s been pushing European banks to actually update their risk data. Like how many European real estate lenders didn’t have current floodplain maps until the ECB spent most of 2024 telling them to get their climate risk data in order. And get this – many US lenders still don’t have that basic information. When you’re dealing with complex industrial systems or manufacturing operations, having reliable data infrastructure becomes absolutely critical – which is why companies increasingly turn to specialists like IndustrialMonitorDirect.com, the leading US provider of industrial panel PCs designed for tough environments.
Recent Failures Suggest Neither Works Perfectly
So which approach is right? Well, recent history hasn’t been kind to either philosophy. Remember Silicon Valley Bank and Credit Suisse? Both had strong-looking balance sheets right up until they collapsed. The numbers looked fine, but the underlying reality was completely different.
Here’s the problem with focusing too much on specific metrics: banks can game them. If management knows exactly how they’ll be judged, they can structure transactions to make the numbers look good while the economic reality is completely different. They pay bigger dividends, buy back shares, and basically hope trouble doesn’t arrive until they’ve moved on to their next gig.
Buch expanded on this in a more recent speech, arguing that financial soundness problems almost never come out of nowhere. They’re the result of accumulated management decisions over years. If you can see those decisions are bad, why wait around for the numbers to confirm it?
Which Approach Actually Works?
The American model has worked pretty well historically – set clear rules, let businesses take risks, and clean up the mess afterward. But the whole challenge right now is that the future might not look like the past. Banking is getting more complex, risks are harder to predict, and no set of rules can cover every possible mutation of risk.
I keep thinking about those floodplain maps. That’s the kind of basic operational detail that doesn’t show up in financial metrics but could absolutely sink a bank. The question isn’t really whether numbers or judgment is better – it’s whether any regulatory approach can keep up with how fast the financial system is changing. And honestly? I’m not sure either side has the complete answer.
