U.S. Federal Reserve Governor Michelle Bowman called for less opacity in banking supervision, saying the supervisory and regulatory approach needs to be updated to better serve the financial system.

"The greater flexibility allowed in the supervisory process can lead to poor outcomes, often caused by the temptation to use inaction and opacity as supervisory tools," he said Monday in remarks prepared for an American Bankers Association conference for community bankers in Phoenix.

"These tools, inaction and opacity, are not appropriate and should be subjected to proper scrutiny or purged from the toolbox altogether."

Bowman pointed to several areas that, in his opinion, should be reviewed, including supervision, bank applications and regulation.

He questioned whether current supervision "has led to a world in which core financial risks have been de-prioritized and too much importance has been given to non-core and non-financial risks, such as IT, operational risk, management, risk management, internal controls and governance."

Bowman said regulators need to take a step back from the entire banking regulatory system and ask "what's working, what's broken and what needs to be updated."

"When a bank requests feedback and engages in good faith to provide information and respond to reasonable questions, regulators have an obligation to provide a clear response," he said.

Bowman also called for a "specialized resource" that could be used by any of the Fed's Reserve Banks during pre-application discussions with new bank applicants with the goal of "identifying and finding achievable paths to yes." He also said some of the same issues arise in merger applications.

"In my view, the purgatory of a lengthy application process is another form of regulatory 'inaction' that should be eliminated," he said.

Monetary policy

Bowman also referred to monetary policy in his comments and said that it is "in a good place now." He said that while core measures of inflation are elevated, he expects the rate of price change to moderate further this year.

Bowman cited "upside risks" and noted that progress back to the 2% target has been "slow and uneven." The underlying consumer price index remained elevated in January, up 3.3% on the year.

"Having entered a new phase in the process of moving the federal funds rate toward a more neutral policy stance, there are some considerations that lead me to prefer a cautious and gradual approach," he said. "Given the current policy stance, I believe that the more favorable financial conditions stemming from the rise in equity prices over the past year may have slowed the move toward disinflation."

Bloomberg