Federal Reserve Vice Chair for Supervision Michelle W. Bowman, the central bank's top banking regulator, told the U.S. House Committee on Financial Services on June 04, 2026, that the U.S. banking system remains sound and resilient while regulators continue to revise supervisory and regulatory frameworks for banks, nonbank competition, artificial intelligence, stablecoins, liquidity and capital standards.

Bowman delivered the testimony before Chairman Hill, Ranking Member Waters and other members of the Committee in Washington, D.C. She said her remarks would address three areas: current banking conditions, regulatory and supervisory reforms since the Committee's last prudential regulator hearing, and the Federal Reserve's path forward as it seeks to promote the safety, soundness and stability of the U.S. financial system while supporting economic growth. The wide-ranging agenda reflects the pace at which the regulatory landscape has evolved since the 2023 failures of Silicon Valley Bank, Signature Bank and First Republic Bank exposed gaps in supervision and liquidity management for regional and mid-size institutions.

Banking conditions

Bowman said banks continue to report strong capital ratios and significant liquidity buffers, leaving them well positioned to support economic growth. She said the banking sector is showing strong health through sustained lending growth and robust profitability. Delinquencies have risen slightly in recent quarters, but remain within historical averages, according to her testimony.

At the same time, Bowman said the competitive landscape for financial services is changing. Non-bank financial institutions, or NBFIs, are taking a larger share of the lending market and are competing with or displacing traditional banks without being subject to comparable regulatory standards. She said part of the growth in NBFI lending reflects a "shift" of traditional banking activities away from regulated banks and toward nonbanks. One example she cited is the movement of mortgage loan origination and servicing into the nonbank financial sector.

Although bank lending to NBFIs has grown rapidly in recent years, Bowman said supervisory monitoring and Federal Reserve surveys show that banks have tightened lending standards for NBFIs because of concerns about underwriting and collateral quality. She cited the Supervision and Regulation Report accompanying the testimony and the April 2026 Senior Loan Officer Opinion Survey on Bank Lending Practices, available at https://www.federalreserve.gov/data/sloos/sloos-202604.htm.

Bowman also addressed technological change, including the rapid development of artificial intelligence capabilities and the risks and benefits of AI use. She said recent advances in frontier AI models have sharply accelerated the identification of cyber vulnerabilities across critical infrastructure, including the banking system. That capability can help strengthen cybersecurity defenses, but it also reveals new vulnerabilities to potential cyberattacks, she said.

The Federal Reserve is committed to supporting government-wide efforts to improve cybersecurity and to working with banks as they manage this threat environment, Bowman said. She added that managing emerging cyber risks effectively will require continued collaboration between public and private entities, continuous monitoring of AI developments, regular stakeholder communication and agile regulatory and supervisory frameworks that can keep pace with rapid technological change.

Community banking reforms

Bowman said the Federal Reserve has made substantial progress in modernizing the regulatory and supervisory framework since her last appearance before the Committee. She emphasized that oversight of community banks remains a priority because those banks are important sources of credit for families, businesses and local economies.

The Federal Reserve's supervisory and regulatory framework should be calibrated to support growth while maintaining safety and soundness, she said. Federal banking regulators have finalized reforms to the community bank leverage ratio, or CBLR, framework. Under the changes, a broader range of qualifying banks can use a simple leverage ratio to measure capital adequacy instead of the more complex risk-based capital framework.

Bowman said the rule calibrates the CBLR at 8 percent, consistent with the statute, and extends the grace period for banks to return to compliance from two quarters to four quarters. She said the changes make the simplified framework accessible to more community banks and allow it to operate as Congress intended. She cited the Board of Governors of the Federal Reserve System press release, "Agencies Finalize Changes to Enhance Community Bank Leverage Ratio," issued April 23, 2026.

Capital framework modernization

Beyond the CBLR, Bowman said federal banking agencies in March published proposals to modernize the U.S. regulatory capital framework. She said the proposals clarify requirements, align them with actual risks, reduce overlap and duplication, and support credit extension to the U.S. economy while preserving strong capital levels and safety and soundness.

The proposals would modernize the capital framework for the largest banks as well as for smaller and less complex banks, Bowman said. She said they were calibrated through a bottom-up review of each capital element, rather than by reverse-engineering capital requirements to achieve a predetermined outcome. Together with earlier updates to the enhanced supplementary leverage ratio and the stress testing program, the changes are intended to allow capital to flow more efficiently while maintaining strong prudential standards that protect financial stability.

Bowman said the proposals are also intended to encourage responsible mortgage lending within the banking system by reducing disincentives for those activities. Since 2008, the share of bank-originated mortgages has fallen significantly, from about 60 percent to around 35 percent in 2023. Over the same period, the share of mortgage servicing conducted by banks declined 50 percent.

Because mortgage origination and servicing are central to the customer relationships that support the community bank business model, Bowman said better-calibrated risk weighting for those activities would encourage community banks to return to offering those foundational services. She cited the Board's March 19, 2026, press release, "Agencies Request Comment on Proposals to Modernize the Regulatory Capital Framework and Maintain the Strength of the Banking System," and her February 16, 2026, speech, "Revitalizing Bank Mortgage Lending, One Step with Basel," delivered at the American Bankers Association 2026 Conference for Community Bankers in Orlando, Florida.

Supervision and CAMELS changes

Bowman said Federal Reserve supervision continues to advance risk-based tailoring that aligns oversight with each bank's size, complexity, business model and risk profile. She said that approach is designed to prevent standards created for the largest and most complex firms from being inappropriately applied to community and regional banks.

The Federal Reserve's supervision focuses on material risks to a bank's financial condition and overall strength, she said. As part of this effort, staff conducted a comprehensive review of all outstanding matters requiring attention, or MRAs. Bowman said the review found that many previous MRAs cited procedural or documentation deficiencies rather than threats to safety and soundness. Other MRAs applied best practices from the largest and most complex banks to institutions with very different business models and risk profiles.

That approach diverted bank and examiner attention away from material financial risks and inherently discouraged innovation, Bowman said. She said the MRA review supports recalibrating supervision to prioritize what matters most and to apply appropriately tailored expectations.

Bowman also said that, under her leadership of the Federal Financial Institutions Examination Council, federal agencies and state bank regulators proposed revisions to the CAMELS rating framework, which has been largely unchanged since 1979. The revisions introduce clearer and more objective metrics for each component and replace subjective management assessments with measurable factors. Bowman said the approach ensures ratings reflect a bank's overall safety and soundness, rather than isolated or process-driven deficiencies.

Innovation, tokenization and AI

Bowman described innovation as essential for meeting customer expectations, lowering costs, improving services and maintaining a banking industry that can adapt to new technologies. She said this is especially important because banks face intense competition from nonbank financial institutions.

The Federal Reserve has prioritized open communication with banks to understand challenges related to innovation and to improve how regulators facilitate, oversee and support responsible innovation, Bowman said. She noted that federal banking agencies recently updated the capital treatment for "tokenized" securities, clarifying that the capital rule is technology neutral by providing identical capital treatment to similar non-tokenized assets.

The Federal Reserve also revised its model risk management guidance to adopt a principles-based and risk-based approach tailored to a bank's business model, risk profile, size and operational complexity, Bowman said. She said the revised guidance provides greater flexibility for implementing new technologies. The Fed also replaced what Bowman described as an overly restrictive policy statement with one that encourages appropriate adoption of innovation at Board-supervised banking organizations.

Bowman said regulators must ensure there is a path for responsible innovation in the banking system, including the use of AI.

Regulatory thresholds and stress testing

Bowman said more work remains despite the progress made. The Federal Reserve is working to ensure that thresholds throughout regulatory and supervisory frameworks are appropriately calibrated and updated over time to reflect economic growth and inflation, she said.

Regulatory thresholds are used to tailor requirements and supervisory expectations based on bank size, complexity, business model and risk profile. But because those thresholds are not automatically adjusted for inflation or economic growth, small and low-risk banks that grow with the economy can cross thresholds and become subject to requirements designed for much larger and more complex banks, Bowman said. She said that result is contrary to the original intent of the regulations.

As an example, Bowman cited Regulation O, which governs lending to bank insiders. She said its thresholds have not been updated in several decades. Although they were reasonable when established, she said they now discourage well-qualified local business leaders from serving on community bank boards, limiting access to valuable expertise and governance. Bowman said Regulation O and other thresholds are under comprehensive review to ensure regulations remain aligned with their original intent and are properly calibrated. Regulators are also considering approaches to tailor the mutual bank framework in a way that preserves mutual banks' ownership structure and business model and reflects their lower risk profile and community focus.

Tailoring affects banks of all sizes, Bowman said. For large banks, stress testing remains a regulatory cornerstone. She said the Federal Reserve is reviewing comments on proposed changes to the stress test. The proposal would increase transparency in how stress tests are conducted, allowing stakeholders to identify model weaknesses and helping banks better plan capital needs across business lines.

Payments fraud, stablecoins and liquidity

Bowman said addressing payments fraud is another important initiative that requires coordination across the public and private sectors. No single agency or institution can address the challenge alone because the threat is too complex and far reaching, she said. The Federal Reserve is pursuing public-private engagement on the issue and expects to share outcomes from those collaborative efforts.

Federal banking agencies are also developing regulations for stablecoin issuers as required by the GENIUS Act, Bowman said. The law establishes a new federal framework for dollar-pegged digital tokens and presents a significant opportunity to bring financial innovation into the regulated banking system with appropriate safeguards. Bowman said regulators are committed to a framework that protects consumers, financial stability and payment system integrity while also enabling responsible innovation.

The Federal Reserve is also strengthening liquidity regulations to support banking system stability and promote sound liquidity management, Bowman said. These efforts focus on formally recognizing discount window collateral in liquidity regulations. She said doing so helps ensure that banks can meet obligations under stress while maintaining their ability to provide liquidity to customers and communities. The change addresses a long-standing gap in U.S. banking practice: banks have historically been reluctant to borrow from the discount window during stress periods because of the stigma associated with using the facility, a concern that surfaced prominently during the March 2023 banking turmoil when some institutions delayed accessing emergency liquidity.

International work

Bowman said that, as Vice Chair for Supervision and Chair of the Standing Committee on Supervisory and Regulatory Cooperation of the Financial Stability Board, she leads international efforts to modernize supervisory and regulatory frameworks as the financial system evolves. The Financial Stability Board coordinates financial regulation across G20 nations, making alignment on standards for AI, capital and digital assets a growing priority as banking activity increasingly crosses borders. She said a report on international modernization efforts will be released for public comment later this year.

Bowman also said the Financial Stability Board's Standing Committee on Supervisory and Regulatory Cooperation will publish a report next week on sound practices for financial institution use of AI. The report is intended to guide institutions in safely adopting and effectively using AI.

In closing, Bowman said the initiatives she described reflect the principle that appropriately calibrating regulatory and supervisory requirements strengthens both financial stability and economic growth. She said that by tailoring requirements to actual risk, focusing supervision on what matters and integrating innovation into the regulatory framework, the Federal Reserve is creating conditions for banks to thrive while maintaining safeguards expected by the American people.

The official testimony is available at https://www.federalreserve.gov/newsevents/testimony/bowman20260604a.htm.