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John Rogers:

Good afternoon, ladies and gentlemen. My name is John Rogers, and I am the chairman of the Atlantic Council, and we are delighted to welcome you all here for today’s Atlantic Council Front Page.

Now, when the United States began building a national system of bank supervision during the Civil War, the task fell to Hugh McCulloch. Now, McCulloch was an interesting choice. He was a banker from the Midwest, and initially he had opposed the legislation that created the very system that he would soon be charged with supervising. But McCulloch understood something fundamental about what makes supervision effective. He wrote that a good bank examiner needed a thorough knowledge of practical banking. And McCulloch himself traveled extensively to see banks and understand what was happening on the ground. So, though more than 160 years later, our financial system would be almost unrecognizable to him, but some truths have endured.

Effective supervision still requires technical expertise and independence. It still requires integrity. And perhaps most importantly, it requires judgment informed by an understanding of how banking actually works. The dollar sits at the center of the international financial system, and American banks and capital markets connect households and businesses and governments around the world. And when stresses emerge in global markets, decisions made at the Federal Reserve can reverberate far beyond Washington.

Now, our GeoEconomic Center, it was created to work at the intersection of economics, finance, and foreign policy, and to help break down the traditional barriers between financial and political. And our team examines many of the same questions that are confronting our guests today: how to preserve financial stability while supporting economic growth, how regulation should adapt as technology transforms finance, and how the United States can work with its partners to shape the rules and institutions underpinning the global economy.

Now, to address these issues, we are especially pleased to have with us the vice chairman for supervision at the Federal Reserve. Governor Michelle Bowman is with us today, and I couldn’t be more delighted because the governor, she brings a rare and deeply valuable perspective to the Federal Reserve. Before coming to Washington, she worked at a bank. She worked at Farmers & Drovers Bank in Kansas, where she learned community banking firsthand, serving customers, understanding local businesses and families, and making practical judgements about credit and risk.

She later served as Kansas State Bank Commissioner, experiencing banking from both sides of the supervisory desk, first as the banker, managing risk just like McCullough, and then as a regulator, evaluating the safety and soundness of that risk. Now, that experience gave her an understanding of banking that cannot be gained solely in academic journals or in Washington salons. When Congress designated the Federal Reserve Board seat for someone with demonstrated community banking experience, Governor Bowman was the first to be appointed to fill that role. And it was through her work at the Federal Reserve that she was tapped and promoted into her role as vice chairman.

So after her opening remarks, the vice chairman is going to join Josh Lipsky, the chairman of our international economics, and more importantly, the head of our GeoEconomics Center from its very inception, and they’re going to have a moderated conversation. So I’d ask you ladies and gentlemen to give a warm welcome to the vice chairman of the Federal Reserve, the distinguished honorable Michelle Bowman. Thank you.

Michelle Bowman:

Well, good afternoon. And I’d like to thank the Atlantic Council for the invitation to join you today, and especially John, your distinguished chairman, for the warm welcome.

It’s a pleasure to be with you here today to discuss our work at the Federal Reserve Board and how it interacts with the US Treasury market. The US Treasury market plays a foundational role in the US economy. It is central to the transmission of monetary policy, the funding of the federal government, and the stability of the broader financial system. Because large banks play such a critical role in this market, bank regulations, particularly capital requirements, can significantly impact how well it functions. And this is precisely why we must continuously monitor the effects of our regulations to ensure that they’re working as intended.

So today, I will discuss the Enhanced Supplementary Leverage Ratio, or the eSLR, a capital requirement intended to operate as a backstop to risk-based capital requirements in the United States.

As the Treasury market has grown over time, it became apparent that the eSLR was imposing a binding constraint on many large bank dealers, curtailing their capacity to provide liquidity to this market. This unintended regulatory effect prompted the Federal Reserve to temporarily reduce the effects of the eSLR in the spring of 2020 when the Treasury market experienced severe illiquidity during the onset of the COVID-related tightening in financial market conditions.

In the first six months of my term as vice chair for supervision, the Federal Reserve Board recalibrated the eSLR with that reality firmly in view. This recalibration was widely acknowledged to be necessary because the eSLR, which was adopted in 2014, did not function as it was originally designed. So today, I will share an initial assessment of how these reforms have affected Treasury market activity. And I’ll start with the problem with binding leverage requirements.

A leverage capital requirement functions best when it serves as a backstop to risk-based capital requirements. Because leverage-based capital requirements do not account for the risk of the underlying activities, they can provide an important signal, particularly during times of stress, and help to support market discipline. In the United States, the eSLR is a tailored capital requirement that applies only to US GSIBs.

The initial framework required each GSIB to maintain a supplementary leverage ratio of at least 3 percent, plus a leverage buffer of 2 percent. In addition, it required any insured depository institution that is a subsidiary of a GSIB to maintain a supplementary leverage ratio of at least 6 percent to be considered well-capitalized. Under this framework, the eSLR often became a binding constraint rather than operating as a backstop. When it is binding or could approach binding, the eSLR distorts incentives and activities. As a result, firms reduce participation in lower-risk activities, such as intermediating the US Treasury market, and they instead pursue higher-risk activities in search of higher returns without facing corresponding increases in capital requirements. In addition, dealers have also noted their reluctance to expand Treasury holdings simply out of a concern that it could become binding.

This misalignment of incentives drove inefficient capital allocation throughout the financial system, ultimately undermining the very market stability that these requirements were designed to protect. Research confirms that the eSLR was one of the main constraints on dealers’ capacity to intermediate in Treasury markets because it is risk blind, treating treasuries the same as riskier asset classes.

In particular, when banks are constrained by the eSLR ratios, they tend to hold smaller Treasury positions, hampering market liquidity as trading decreased and dealer intermediation margins increased. In addition, following shocks to the size of bank balance sheets, the reduction in Treasury market participation was larger for banks with lower SLRs.

To address this issue, in November of 2025, the board, together with the FDIC and the OCC, finalized long overdue and necessary changes to the eSLR standard. The board recalibrated the eSLR buffer standard for GSIBs to equal 50 percent of a GSIB’s Method 1 surcharge calculated under the board’s GSIB surcharge framework rather than the previous leverage buffer standard of 2 percent. For GSIB depository institution subsidiaries, the eSLR buffer standard is equal to 50 percent of a GSIB’s Method 1 surcharge, capped at 1 percent. The cap recognizes that the Method 1 surcharge of apparent GSIB may be partly driven by activities outside of the depository institution subsidiaries of the GSIB.

This new approach tailors the eSLR to each GSIB’s systemic footprint and produces a calibration that is consistent with the objective for the supplementary leverage ratio requirements to act as a backstop to risk-based capital requirements. In addition, it promotes international consistency, aligning the leverage ratio framework published by the Basel Committee for Banking Supervision.

The final rule became effective on April 1st of 2026, with optional early adoption beginning on January 1st of this year. Seven of the eight US GSIBs adopted it early in the first quarter. So I’ll tell you about some early results that we found so far. The impact of this recalibration has been encouraging.

So far this year, evidence shows that leverage ratio reforms have improved Treasury market functioning and strengthened its resilience to stress by relaxing regulatory balance sheet constraints. According to some estimates, the parent bank holding companies of the six dealers gained nearly five trillion dollars of additional eSLR headroom in Q1 of 2026, the first quarter during which the modified rule was applied. Recent supervisory data also shows clear benefits from this regulatory treatment.

Following the eSLR revisions, dealers increased their Treasury market positions as all of the largest banks benefited from significantly greater headroom. Our supervisory data show that dealers’ total Treasury positions have increased from roughly 600 billion at the beginning of the modification period to over 700 billion at the end of April. This increase was concentrated among the firms that had consistently maintained the lowest eSLR buffers over the previous twenty-four months and were constrained by the eSLR.

This pattern suggests that the sharp increase in positions was driven by dealers taking advantage of additional headroom created by the modification. This is translated into greater balance sheet capacity at dealer subsidiaries, and the revised eSLR standard provides additional headroom for firms to increase their overall Treasury holdings using their existing capital base and enables them to support other low-risk but balance-sheet-intensive market-making activities, like Treasury market intermediation.

It has also created a structural increase in balance sheet capacity for banks that were constrained prior to the rule change. For these firms, additional capacity was deployed to dealer subsidiaries. While all US GSIBs seem to have benefited from the eSLR relief, only a few of them utilized additional balance sheet capacity for US Treasury activities. This analysis is confirmed by a forthcoming research note prepared by the Federal Reserve Board staff members examining how the new eSLR rule affected dealers’ Treasury market activity. The note finds that dealers’ Treasury positions increased notably after the rule was implemented, and the increase was driven by banks with the lowest eSLR buffers and that were more constrained by the prior rule.

These findings are also reinforced by our market outreach. Market contacts have cited the lower eSLR requirements for US GSIBs as a primary driver behind the decrease in capital constraints for bank holding companies. One dealer reported that leveraged capacity at GSIBs surged from 1.8 trillion in the fourth quarter of 2025 to 6.4 trillion after the new rule took effect.

Banks have been actively deploying this increased capacity with leveraged exposure across GSIBs increasing by approximately $900 billion. Some institutions directly attributed the increase in their Treasury holdings to the repo market activity and repo market activity to the eSLR recalibration, as reflected in the March 2026 Senior Financial Officer Survey. In targeted outreach to individual firms, market participants highlighted that by expanding GSIB balance sheet capacity, the lower eSLR requirements improved Treasury and money market liquidity and functioning.

Dealers play a central role in the market by warehousing and distributing treasuries and arbitraging markets. As a result of the eSLR revision, these important market makers have greater capacity to effectively intermediate a growing market, both by helping to smooth price changes on days where there is sizable Treasury issuance and by continuing to make markets in periods of greater market volatility. We’re seeing other market improvements as well.

Recently, dealers have increased their holdings of Treasury securities and hedged these positions by shorting Treasury futures. This increase in dealer holdings has likely absorbed some positions that were previously held predominantly by hedge funds as part of the cash-future basis trade. These conditions are likely to lessen the influence in Treasury markets of investors holding highly leveraged trading positions that are particularly vulnerable to adverse shocks in funding, cash, or derivatives markets. This change supports Treasury market resilience by limiting the potential for a sell-off in cash securities amid volatile conditions, therefore reducing the likelihood of market dislocation.

The expanded bank dealer capacity has enabled some market participants to reduce their exposures without significant market disruption, and we can already see improved market liquidity and functioning across these markets through narrower bid ask spreads, reduced intraday volatility during auction cycles, calmer funding conditions, and greater price stability during periods of elevated supply.

All of this indicates that dealer intermediation is successfully absorbing flows that could have previously caused more pronounced market dislocations. Perhaps most importantly, these reforms deliver their greatest value when it matters most, that is during periods of market stress. As many market participants have noted, while they may not face near term eSLR constraints in normal times, the real benefit of the recalibration is eliminating the likelihood of becoming constrained during risk off or surge activity events, precisely when market liquidity is most crucial. So I’ll turn to the broader lesson, which in my mind is the importance of regulatory modernization.

The success of the eSLR recalibration underscores a critical principle of financial regulatory oversight. We must continuously revisit and modernize our regulations when observations and data reveal frictions or indicate that a rule is no longer functioning as it was intended. This is not merely good policy. It is a legal requirement. We are obligated by law to periodically review our regulations to ensure that they serve their intended purpose, whether that relates to market functioning or the safe and sound operation of financial institutions. Regulations should adapt as conditions evolve and as we gain experience with how the rules operate in practice. When evidence shows that a regulation is creating adverse unintended consequences, we have a responsibility to act.

The eSLR experience demonstrates that thoughtful recalibration grounded in sound analysis and market feedback can meaningfully improve both market resilience and the efficiency of our regulatory framework. This commitment to ongoing regulatory review will continue to guide our approach, ensuring that our rules remain effective, proportionate, and aligned with their fundamental objectives. Thank you very much for the opportunity to share my views on our eSLR rule with you today, and I look forward to our conversation.

Josh Lipsky:

Thank you so much, Vice Chair Bowman. Thank you for coming here to the Atlantic Council to give that speech and thank you for bringing good news, which we don’t always hear. It is nice to hear about a regulatory change that seems to be working. And I want to start there following up on your speech. I have a lot of issues to get to, as you can imagine. I know we’re short on time, but let me just jump in following the speech. You talked about the impetus for creating the change in the first place, some of the stress events in the market over the past five or six years. And obviously you’re seeing some early signs that things are working, but have you seen it tested under the conditions you’re looking for? Have we had those kind of market stress moments or are you waiting to see that to happen to know if these changes have really taken effect as you intended?

Michelle Bowman:

Well, Josh, that’s a really important question. I’ve been on the board since 2018, so I’ve been through a number of different experiences where we’ve seen market dislocations or stresses within markets and we didn’t have the benefit of this adjustment at that time. So I think we learned a lot from the COVID experience where we did have to make some very critical changes to the eSLR requirements on the fly. And we learned a lot from that experience. And my hope is that this will proactively create an environment where those dislocations occur less frequently.

Josh Lipsky:

And what is the timeline you’re looking for? You’ll see how these changes take effect. Do you have benchmarks you look for over the next six months, twelve months before you reassess and if there’s any tweaking that needs to be done here?

Michelle Bowman:

Well, I think at the time we put this rule in place, there were a number of different alternatives that we could have considered and we wanted to make sure that we understood whether we had calibrated it correctly. So I think this initial view is very heartening for us to understand that it is functioning as intended and we’ll hope to ease any market conditions that could become stressful before they occur.

Josh Lipsky:

So let me turn to the broader modernization effort. This has been a busy week for you because the Fed also finalized changes to stress testing framework. And I wanted to hear from you, what were the changes, what have you been trying to address and what should we expect differently going forward?

Michelle Bowman:

Well, I just gave a speech about this in the City of London a few weeks ago where we were on the verge of being able to announce the finalization and that was announced yesterday by a press release that we approved finalizing the rule on a vote of six to one, which is very exciting to see that we had the vast majority of our board supporting that change. So a number of things that it does is it increases the transparency of the tests. So it allows for better planning in advance for capital requirements and the way that banks will be able to plan their capital allocations going forward.

It will also allow for less opacity within the system so that individuals and the public can have a better understanding of how a bank performs under stress and can look at each one of them individually. Another thing that it does is we introduced a rule that will require the averaging of two previous years stress tests so that there’s less volatility in the results. So it allows for banks to plan for larger capital allocations or changes in that requirement from year to year.

Josh Lipsky:

And you’re going to have more input into the process going forward and changes to the framework? Is that part of the modernization effort?

Michelle Bowman:

Absolutely. So we will be subjecting the stress test models every year for public comment and that will allow for an understanding of whether or not we’ve calibrated things appropriately or where we could make improvements prior to the implementation of the test each year.

Josh Lipsky:

And on the transparency point, I think it’s so interesting that we’ll know more about the process going forward. Do you ever worry about too much transparency in stress testing, meaning the bank seeing everything that’s going on and then of course they’re calibrating accordingly based on what’s coming. I’m interested in that push and pull between the overseers, the regulators and the banks themselves.

Michelle Bowman:

So what we think is important is that we’re stressing the right areas and that as we’re doing this, we’re doing it in accordance because the result directly reflects the levels of capital requirements that we need to make sure that we’re doing it according to the APA procedures. And so that was one of the most important changes that we made was subjecting capital requirements to a public comment process. So I don’t worry that it’s more transparent. I think that there are a number of ways that we can support the regulatory stress test through our supervisory activities. And that’s something that I talked about also in that City of London speech where we’ll be doing some supervisory stress test work where we’re working directly with the banks to learn and inform our opportunities to review the bank’s activities through their own internal stress testing so that we can learn what they think is most stressful.

Josh Lipsky:

So let me turn to something that we’ve been working on. I know you’ve been working on and that’s Basel III. This is something Washington’s been talking about for years. I would love to hear from you. Obviously it’s still pending, so we want to hear where you are in the process, comment period, what to expect next, but also just kind of a step back. How is this different from the previous Basel III proposal that happened two years ago? What are the most significant changes? We have a global audience here at the Atlantic Council and this affects not just US banks, but every systemically important bank around the world.

Michelle Bowman:

So I think it’s important to start with how we approached, our approach that was different than previous approaches to the Basel III requirements and the risk-based capital requirements. We took a truly risk-based bottom up approach to each one of the activities, trying to ensure that we were capturing the risk and reflecting that appropriately as we built the components of the Basel III proposal. So we think that that has achieved that purpose and goal and we’re in the process of reviewing and considering the comments. Some of the important changes that it incorporates is following the financial crisis and the aughts, we’ve found that some of the rules that were put in place afterward as a result of Dodd-Frank pushed a lot of traditional banking activity out of the banking system. So the way that we’ve risk-weighted those things is to ensure that we have a pathway to bring a lot of that activity back into the banking system.

Josh Lipsky:

So of course at the Atlantic Council, we work a lot with our European partners, and I’m interested in divergence of rules between Europe and the US, how you think about that issue, especially when it comes to Basel III capital requirements, how you think about alignment between where the Europeans are landing on this and where we may eventually land here in the US.

Michelle Bowman:

Well, that’s an important question. And as you know, Josh, we work very closely with our European and our international counterparts, both through the Basel committee and also through the Financial Stability Board. So we’ve had a number of conversations and I think since I became the vice chair for supervision, there was a little bit of skepticism about whether we would actually follow through with completing these rules. I think everyone was surprised that we were able to introduce them within less than a year of my becoming the vice chair for supervision. And our teams have worked very closely together with the FDIC and the OCC and our Fed staff has just done incredible work in a very rapid way to learn the lessons of the last proposal, to ensure that we were approaching things from a real risk-based approach and taking a fresh look at the way we should be thinking about capital requirements in the aggregate.

The feedback that I’ve heard from the international community is, I think they’re pleased that we’re working our way toward finalizing the rule. I think that they appreciate some of the ways that we have chosen to move forward and to address some of our requirements in a different way. And I think many of them had put implementation on hold until we were able to finalize our rules. And I think they’re working toward understanding what our final rule will look like so that we can be aligned.

Josh Lipsky:

Well, I know we, like the rest of the world, will be looking forward to the final rule and excited to hopefully have you back then and we’ll see where we land on Basel III.

Michelle Bowman:

Well, we expect to have it finalized before the end of the year, so that’s the goal.

Josh Lipsky:

Not too far away then.

Michelle Bowman:

Not too far away.

Josh Lipsky:

A lot of work to be done.

Michelle Bowman:

Yeah, absolutely.

Josh Lipsky:

So I want to go to some other news from the Fed over the past month, and that was the independent report on Silicon Valley Bank. And let me just start by saying credit to the Fed. It’s not so easy to do this to take this self-reflection on any institution, let alone a central bank. And there are many interesting things in the report. And for those who haven’t read it, I highly encourage them to do so, including the findings that social media didn’t play the role that many though in the acceleration. But I wanted to ask you about the culture point and I’ll read you the line. The independent review says, “Supervisors knew or should have known about material vulnerabilities at SVB well before its failure, but a culture risk aversion has contributed to inaction.” And what I’m really wondering is we can talk about regulatory changes and modernization, but how do you change culture?

Michelle Bowman:

Well, I think if you’ll ask any CEO, it’s a very difficult thing to approach and to change. A number of different CEOs that I’ve talked to have said that really the only way that you can change culture is by changing the approach that individuals take to address issues. I think you can change structure of organizations and create new pathways for decision making and for collaboration. And we’ve undertaken a number of those over the past year or so since I became the vice chairman for supervision. One in particular that is also noted in the review, I believe it was by Vice Chair Quarles, that called our committees for considering different potential supervisory actions, a “miasma of different committees.” And I would say that that was right. They’re more than, when I asked for an accounting of how many committees that we had, because I would always ask staff for a meeting or a discussion and they say, “Oh, I can’t. I’ve got a committee meeting.”

And my thought was, “Really? Okay, well, how many committees do we actually have?” More than ninety committees for four thousand staff across the system. And none of them felt like they had any accountability for a decision or that they had any authority to make a decision. So it was a little bit of everyone’s participating, but nobody’s responsible for the decision. And oftentimes decisions just never got made. And one example that I can give directly from being the Kansas Bank commissioner was when I was there and were working on, I think it was an MOU or some kind of an enforcement action that would’ve been joint with the Federal Reserve of Kansas City and the state of Kansas. By the time we finally got a copy of the draft of that enforcement action, the bank had already mitigated the circumstances that led to it to be in that condition and the violations to begin with.

It had been over a year. That’s just not an acceptable timeline for supervisory action. Banks want to get themselves out of a condition where they’re in violation. And if you’re waiting a year to tell them exactly what it is, then that’s a problem. More recently, we had an example of just giving an enforcement action or publishing an enforcement action just weeks before a bank failed. It’s not timely, it’s not effective, and it certainly doesn’t add to a culture where there is accountability and where we can be proud of the work that we’re doing. So we’re making a number of changes with not just process, but also people. We’ve reorganized the board and the way that we sit and we’ll be working soon on how we’ll be thinking about the rest of the reserving system.

Josh Lipsky:

Thank you. I think that’s very insightful, both from a Fed perspective, but a broader leadership challenge in any organization, how they think about shifting culture and accountability and streamlining. So obviously—

Michelle Bowman:

Can I add—

Josh Lipsky:

Please.

Michelle Bowman:

—just one more thing to that? I think our staff is very relieved to be able to actually put words to the challenging culture that existed, and some of it continues to exist at the board, but I think everyone wants it to change. And I think when we’re all rowing our oars in the same direction and we all recognize the critical nature and the importance of a safe and sound banking system, we want to make sure that we’re positioned appropriately and that everyone understands what their role and responsibility is as we’re working toward that goal.

Josh Lipsky:

So we need the Fed to all be rowing in the same direction to face the challenges that are coming. And that’s one of them I want to ask you about, which is AI. When people heard you were coming, the number one thing people asked me to ask you about was AI. Easier said than done. There’s a hundred different ways to ask that question. So I’ll ask it this way. I want to ask about AI and payments in the banking system. There’s been a recent series of reports and studies, we’ve done some here at the council, others have done, showing that AI could affect deposit base within financial institutions. Basically, the idea being through agentic payments, you can remove frictions that currently exist that prevent me from moving my deposits overnight and earning the small interest I earn into something that could earn better overnight. And that could fundamentally change the holdings within banks.

And I’m wondering from the Fed’s perspective, how you’re thinking about financial stability in AI. Are you talking to banks about this issue and what should we expect going forward?

Michelle Bowman:

Well, absolutely. AI is a very important issue, not just for the banking system, but for the world more broadly. And we certainly want banks to innovate in a responsible, but also a safe manner. So as we’re thinking about and as we’re seeing and talking to our banks about how they’re using AI within their service model for enabling their customers to do different types of business and to assist with back-office operations, it’s really important that one, we are creating an environment where we understand how it’s being used and we also understand the vulnerabilities that it may introduce. I know everyone’s familiar with the frontier AI models that have been introduced and the work that’s being done around the world in critical infrastructure to ensure that our code is resilient to any potential vulnerabilities. So those are important aspects. We’re also making sure that it’s not just the largest banks that we’re concerned about, making sure that they’re resilient as well.

So from my hat as chairman of the FFIEC, which is the Federal Financial Examination Council, I think I missed one of the—

Josh Lipsky:

I’ll take your word for it.

Michelle Bowman:

—but the membership of that is the OCC, FDIC, Fed, CFPB and NCUA plus a state liaison committee of five different states that are a part of that organization. As a part of that, we are working with any third-party service provider that may be providing services to our smallest institutions that may not have access to or may not even be able to leverage the benefit of a frontier AI model on their systems to ensure that those third party service providers understand our expectations that whatever services that they might provide would be resilient to those vulnerabilities as well, so that they’re not introducing additional vulnerabilities into those smaller institutions.

So we’re trying to take a very broad, but also very narrow approach to how we’re thinking about it. But I don’t think you can get around the fact that AI is going to be a part of all of our lives going forward and that we need to make sure that we can allow it to exist and be utilized in the banking system in a safe and sound way.

Josh Lipsky:

Are you finding internally at the Fed usage of AI? I’m thinking modeling, risk scenarios, all the work you do and your colleagues across the Fed do, how you find those tools and adapting to those tools?

Michelle Bowman:

Well, one really exciting thing about when Chairman Warsh came in as our new chairman a few months ago, he has really embraced AI and he has an initiative that allows us all to utilize it in much more effective ways. So it’s something that we’re learning how to use and I know pretty much everybody uses it at home. So it’s nice to be able to integrate it into the work that we’re doing as well.

Josh Lipsky:

Well, if the Fed can integrate it into their work, then I think we all should and can into our work. That’s what I take away from that. Two more for me and then I’m going to try to get one or two from the audience, one online and one in here. I know we’re very short on time, but I have to ask about stablecoins and digital assets. This is a big area of work for us at the Atlantic Council and our Future of Money program. And we had Governor Waller here, your colleague, last year talking about these issues. But from your supervisory role, I’m wondering about the rise of non-banks, how you think they impact the financial system, how stablecoin issuance, those issues are impacting the financial flows and how you think of it from a regulatory and oversight perspective.

Michelle Bowman:

Well, as you know, the Congress passed the Genius Act over a year ago and we just recently, we’ve been busy in September. So we just introduced our proposed rule making that our board just voted on a few weeks ago. So we recognize that this is going to be or could potentially be a large part of the financial services sector. And we want to make sure that our banks have the opportunity to be able to participate as well. So I think who knows what the future may bring, but we certainly want to make sure that there’s a framework in place that allows our banks to participate in that as well.

Josh Lipsky:

And these skinny master account ideas, this is still going forward at the Fed, bringing non-traditional institutions into the Fed process.

Michelle Bowman:

Well, there’s currently, I believe, one institution that is utilizing a skinny master account. And we look forward to learning the lessons of how they’ve leveraged that usage and understand what that means for master accounts going forward.

Josh Lipsky:

Okay. Final one for me, and it won’t be a surprise. I have to ask you about monetary policy. We couldn’t let you leave the Atlantic Council without doing that. So let me frame it this way. A unanimous vote in September to raise interest rates. We’re coming into the next FOMC end of October. Obviously a lot of data between now and then. What are you looking for? What are the benchmarks we should be looking for as those watching the Fed? And more broadly, how do you see the dual mandate imbalance right now?

Michelle Bowman:

Well, of course, that’s an important question and you couldn’t get away with not asking me that. So I would first start by saying that inflation remains above our target, but after the committee’s action in September, what we need to have is a better understanding of how the underlying trends in the economy and how financial conditions are evolving going forward. So I don’t currently see an urgent need for further action and I think we need to better understand the totality of the data, but remain attentive to the risks.

Josh Lipsky:

You don’t currently see an urgent need for more action?

Michelle Bowman:

I don’t currently. After the committee’s action in September, I think we need some time to understand how that will work its way through the economy.

Josh Lipsky:

The median projection after September was one more rate hike before the end of the year, but you seem to be in a bit of a different place. Is that fair?

Michelle Bowman:

Well, I think what I would say is today, I think we need to see how the September increase makes its way through the economy before we decide what further action may need to be taken.

Josh Lipsky:

Great. Let’s try to get in the one minute I have left two questions in, if I can ask your forbearance. Let me take one online and I’m going to try to pull it up on screen. We’ll see if this works and hopefully everyone can see this here and I’ll show this and I’ll read it to you. “The FSB, which you serve as the plenary member of, the Federal Reserve, the Financial Stability Board published its sound practices for responsible adoption of AI.” Of course, another AI question, no surprise. “Stakeholders to weigh in on a menu of twelve sound practices that financial institutions could apply in their organization-wide AI governments. What are some of the next steps and when do you expect a final report?” I’m glad we got an FSB question in.

Michelle Bowman:

Well, absolutely. So this work was actually produced by the committee that I chair, which is the SRC, the supervision and regulation. I always call it committee. I get the C wrong with our acronyms. But this is one of the two work streams that I started. When I became the chairman of the SRC, one was on AI and one was on modernization of financial regulations around the world. So this was the first report that we were able to produce. It was done in record time and we had the most number of comments that any FSB report has ever had, over 160 comments after it was published. I think we recently finalized it or it should be finalized very soon. And the feedback has been fantastic. I think we approached it from a principles-based approach so that it’s not prescriptive. It allows for guiding activities and consideration for entities to adopt AI and to understand its benefits and risks and how it could be used within their organizations.

So I think it’s a fantastic marker in the sand for how we should think about what the next steps might be. And we’re working on our work plans now, but I’m hoping that we’ll be able to integrate some work on how fraud relates to AI and how that might be leveraged within the financial system.

Josh Lipsky:

We very much look forward to that. I know that is a critical issue both in the US and for the international financial community. I want to try to get one question in from the audience. So please raise your hands, please. We’ll run a mic over to you and introduce yourself.

Ananya Kumar:

Thanks, Josh. Hi, my name is Ananya Kumar. I work on innovation policy at Visa. I’m also a senior fellow affiliated with the Atlantic Council. Thank you for your comments. Really appreciate your work with community banks, small banks, and making sure that they’re at an even playing field. They’re important clients for us. I would want to dig into the last part of the answer that you just gave and wanted to focus my question on trust, security, and fraud. From our perspective, it’d be great to hear how the Fed is thinking through managing and mitigating what could be a heightened fraud risk and cyber risk scenario, especially as it could be accelerated with AI. So would love to hear your thoughts.

Michelle Bowman:

Thank you for that question. I think there are a couple of layers about how the Federal Reserve is approaching our work on fraud. And I’ll start with the conversation that I had just over a year ago at our first ever Capital Conference at the Federal Reserve where we started the process of reviewing our four pillars of capital. We had Sam Altman come and do a fireside chat with me over the lunch hour, and I think everyone thought we were crazy. “Why do you have Sam Altman coming to a Capital conference?” But one of the questions that he and I talked about, or one of the issues that we talked about was the increasing and very complex use of AI in spoofing individuals and video representations of individuals to authorize payments, especially in the banking system. So that’s one of the things that we’ve been thinking about over time, which is why I think we need to be integrating those kinds of discussions and conversations into the work that we’re doing at the FSB because it is a very international problem and it’s very complex.

One other thing that I want to highlight is over the last few months, the president’s working group on scams and fraud has met now twice. Yesterday we had our second meeting. The first included social media companies and telecom companies, as well as the FTC chair, FCC chair, and Secretary Bessent and myself. Our meeting yesterday included Secretary Bessent, the attorney general, Undersecretary Lang over at Treasury who oversees terrorism finance, and then also Chairman Warsh was with us as well. We had several GCIP CEOs and a number of community bank CEOs participating in that conversation and round table discussion. And what we hope to get out of that or have gotten out of that is an opportunity to be very specific about ways that we can create roadblocks or speed bumps in processes that exist in our regulatory structure that impair our ability to actually combat, mitigate, and remediate fraud.

So more to come on that, but after the RFI that we published right after I became vice chair, I know everyone’s been waiting for what’s the next step on that and I’m very pleased to have had to convene that conversation to have had such high-level participation and engagement and we look forward to the next steps on that. So thank you for your question.

Josh Lipsky:

Well, Vice Chair Bowman, you’ve been very generous with your time and I know you have an extraordinarily busy schedule. You, like us, are preparing to head to Thailand for the IMF-World Bank Annual Meetings. That is in fact our next event at the Atlantic Council GeoEconomics Center, a series of forty events on the ground in Thailand. We will share with everyone watching online and in the room the way to see that, and we look forward to seeing you there. We wish you and your colleagues at the Federal Reserve all the best of luck in the days ahead. We remain a partner in every way we can at the Atlantic Council. Please join me in thanking Vice Chair for Supervision at the Federal Reserve Michelle Bowman.