Fed chair candidate Bowman calls for a shift in the regulatory thinking around AI and encryption.

Author: Zhao Yuhe, Wall Street Watch

One of the candidates for the next chair of the Federal Reserve, Michelle Bowman, who is primarily responsible for bank regulation, stated to the media on Tuesday that she is currently focused on her regulatory responsibilities, including pushing for changes to capital rules for large banks and addressing the phenomenon of so-called "debanking."

In response to external concerns about whether she intends to take over as the chair of the Federal Reserve, Bowman evaded the question, stating that she is "focused on her current work."

She reiterated her support for the position of lowering interest rates and clearly called on the banking industry and regulators to actively embrace emerging technologies such as artificial intelligence, blockchain, and cryptocurrency; otherwise, the banking system may be marginalized in the future economy.

Focus on Regulatory Responsibilities

Baumann stated that she is currently focused on her regulatory responsibilities, including pushing for changes to the capital rules for large banks and combatting the so-called phenomenon of "debanking."

Bowman stated:

"I have a large work plan that we are rapidly advancing, and clearly, we need to complete the proposed bank capital rule reforms in the near future."

When asked if she was interested in serving as the chair of the Federal Reserve (rather than her current role as vice chair of supervision), Bowman did not respond directly. According to the media, she is being considered by President Trump as one of the candidates for the chair of the Federal Reserve.

"I am really just focused on the work I am doing right now."

She stated that the Federal Reserve is reviewing several capital rules and plans to reintroduce some key measures, but these proposals will not change regardless of whether there is a change in the chairperson.

Baumann has initiated the development of a new capital rule that will be risk-based and impose a lighter burden on large banks in the U.S. compared to the version from the Biden administration. According to media reports, regulators are essentially abandoning the 1,087-page version proposed two years ago and plan to unveil a new proposal as early as the first quarter of 2026.

According to reports, the latest plan is mainly inspired by the comprehensive review meeting of banking capital rules held by Bauman in July. The review aims to ensure that the overall capital requirements are aligned with other proposals being considered by officials, such as relaxing key leverage ratio rules.

She said that regulators are waiting for public feedback on their proposal. The proposal could reduce the capital requirements for large bank subsidiaries by as much as 27%. The consultation period will end on August 26.

Seeking to Reduce Regulatory Scrutiny Related to "Reputational Risk"

Previously, under pressure from banking groups and Republican lawmakers calling for an end to unfair practices, the Federal Reserve had promised that its examiners would no longer consider "reputational risk" in bank examinations.

In another speech that day, Bowman stated that she would seek to reduce regulatory scrutiny related to "reputational risk" and hinted that new relevant rules might be developed.

Previously, at the urging of some banking groups and Republican lawmakers, the Federal Reserve and other banking regulators had promised that their examiners would no longer consider "reputational risk" as a factor when conducting bank examinations. Critics argue that this practice is unfair.

Trump has consistently criticized the practice of "de-banking," which deprives certain individuals and businesses of banking services for ideological reasons. However, some consumer advocates believe this issue has been exaggerated and question whether there is actual evidence that banking regulators have forced banks to stop providing services to specific clients solely due to ideological factors.

Earlier this month, Trump signed an executive order requiring banking regulators to remove "reputational risk" content from guidance and training materials, and to identify banks that illegally refuse to provide financial services to customers. This order was issued after he claimed that banks had previously denied him services due to discrimination.

Reiterate Support for Interest Rate Cuts

Baumann reiterated her stance in support of interest rate cuts on Tuesday, stating that her views have not changed even when they differed from other members of the Federal Reserve Board in July.

"The outside world already knows my position, that's it. I haven't changed my view."

At the July meeting, the FOMC voted to keep interest rates unchanged in the range of 4.25% to 4.5%. Bowman, along with Christopher Waller, became the first pair of Federal Reserve governors in 30 years to dissent against the majority opinion.

The dissent occurred after the White House exerted tremendous pressure on the Federal Reserve over the past few months, urging it to cut interest rates. Media reports indicate that Federal Reserve Board member Adriana Kugler resigned earlier this month, which is also considered part of this pressure campaign.

President Trump then appointed Stephen Miran, the chairman of the White House Council of Economic Advisers, to replace her. Many analysts believe that Miran will be more inclined to respond to Trump's proposals on monetary policy, especially regarding interest rate cuts.

The futures market currently predicts a 25 basis point rate cut in September, but the uncertainty in the market is greater than usual. CME's "FedWatch" prediction algorithm shows an 83% probability of a rate cut next month. Typically, the predictions from this algorithm differ from the consensus results by only a few percentage points.

Call for banks and regulators to change their attitude towards cryptocurrencies and AI

Bowman also spoke at the Wyoming Blockchain Symposium on Tuesday, stating that the banking industry and regulators must embrace the benefits brought by new technologies such as artificial intelligence and cryptocurrencies, or risk diminishing their role in the economy.

She stated that ideally, regulators should allow these new uses to "expand in a way that benefits the banking system."

"Change is coming. If we do not adopt this attitude, we risk rendering the banking system irrelevant to consumers, businesses, and even the entire economy."

She urged the banking sector to assist regulators in better understanding blockchain and digital assets, as well as the potential of new technologies in addressing issues such as fraud.

"I also want to encourage more interaction between the industry and regulatory agencies to help us understand blockchain and its potential in solving other issues. I commit to changing our attitude and culture towards the acceptance and integration of technology, new products, and new services."

Call to Allow Federal Reserve Employees to Hold a Small Amount of Cryptocurrency Products

Baumann also stated that Federal Reserve employees should be allowed to hold a small amount of cryptocurrency products, as practical experience helps employees better understand and regulate the activities in these financial markets. Easing investment restrictions for employees also helps attract and retain skilled bank examiners.

She pointed out that allowing employees to hold "de minimis" amounts of cryptocurrency and other digital assets would help them build a practical understanding of these products.

"Nothing can replace personally operating and understanding the holding and transfer processes of these assets. I certainly wouldn’t trust someone who has never worn skis to teach me how to ski—no matter how many books they’ve read or how many articles they’ve written."

Bowman did not specify the holdings or asset types she was referring to, but analysts believe her statement once again demonstrates the Trump administration's regulatory agencies' friendlier attitude towards the cryptocurrency industry. Previously, after a long period of requiring banks to overcome numerous review hurdles before entering this field, the Federal Reserve and other banking regulators have taken several measures to ease restrictions on banks engaging in cryptocurrency business.