Federal Reserve Vice Chair Michelle Bowman recently signaled a significant shift in banking regulation, advocating for more flexibility to help banks compete in a changing financial world.
This call for flexibility comes as non-bank financial institutions, often called the 'shadow banking' system, have grown enormously. The Financial Stability Board reported this sector now represents about half of all global financial assets. A key part of this is private credit—lending by investment funds instead of banks—which has ballooned from around $2.1 trillion in 2023 to an estimated $3 trillion by early 2025. This explosive growth means banks are losing ground in their traditional business of corporate lending.
To understand this policy shift, we need to look back at recent regulatory actions. First, regulators proposed easing the enhanced Supplementary Leverage Ratio (eSLR) in mid-2025. In simple terms, the eSLR is a strict capital rule that required big banks to hold a certain amount of capital against all their assets, regardless of risk. While intended for safety, it sometimes made even very safe activities, like holding Treasury bonds, unprofitable. Easing this rule would give banks more capacity to engage in low-risk business.
Second, in late 2025, the Fed issued new principles for its bank examiners. It directed them to focus on 'material risks'—the truly significant threats to a bank's health—rather than getting caught up in procedural box-ticking. This is designed to make supervision more effective and less burdensome, allowing banks to be more agile and innovative.
Therefore, Bowman's testimony wasn't out of the blue. It was the logical next step, publicly tying these two initiatives together into a coherent strategy: give banks the flexibility to compete, supported by smarter, risk-focused supervision. This theme has been consistent across her speeches and aligns with similar moves at other regulatory agencies.
Of course, this doesn't mean a return to pre-2008 deregulation. Regulators are very aware that the lines between banks and the less-regulated non-bank world are blurring. As banks increase their dealings with private credit funds, new risks can emerge. Therefore, this push for flexibility is being carefully balanced with "guardrails" to ensure the financial system remains safe and sound.
- Terminology -
- Non-bank financial intermediation (NBFI): Financial activities, like lending, that happen outside the traditional banking system. Also known as shadow banking.
- Private Credit: Direct lending to companies by specialized investment funds, rather than banks.
- enhanced Supplementary Leverage Ratio (eSLR): A capital requirement for large banks, measuring their capital against total assets without adjusting for risk.