interaction between industry and regulators. this industrya€ “ regulator interaction must allow for feedback and information sharing throughout the innovation life cycle and incorporate regulatory feedback on innovation. there is more that can be done to accomplish this. while we should expand opportunities for regulators to provide clear, actionable, and timely feedback on innovation proposals, we should also consider developing regulatory " sandboxes, " those designed to allow some degree of testing and experimentation. we should also ensure our regulatory staff understands and appreciates the value of responsible new technologies, so they may contribute to crafting a sensible regulatory approach to financial innovation. the more that regulators understand innovation, the more comfortable they will be in accepting and promoting its adoption in the financial system. as part of this framework, we also must consider the broader financial system. the " regulatory perimeter " between regulated banks and other parts of the financial system is a permeable barrier, and not only can activities shift between the two - as we saw with the migration of mortgage servicing in the united states - but risk can shift between the two as well. as our financial system has grown and become more complex over time, it has also become much more interconnected. banks often have direct exposure to activities and risks that occur in other parts of the financial system. even when they do not have direct exposures, they may have indirect exposures to financial stability risks originating in other parts of the financial system. closing thoughts 7 / 8 bis - central bankers'speeches the most unfortunate approach to innovation would be to simply prohibit it, or to impose such onerous standards that effectively discourage innovation or prevent it from developing and flourishing. this approach would not only decrease the importance and relevance of the banking system, but it could also generate new financial stability risks as activity migrates to areas with lower regulatory standards and less transparency. broadly speaking, the regulatory framework should be dynamic, one that can and should accommodate new technology and services. where the same underlying activity presents the same risk, there is a strong case to be made for imposing the same type of regulation. but we must successfully balance the standards that protect households and businesses and prohibit criminal and other illicit financial activity with maintaining the safety and soundness of individual financial institutions and the stability of the broader financial system. we must also prioritize working on a whole - of - government approach to ensure we appropriately monitor and manage the risks of financial activity, no matter where those occur. as we continue to enhance our understanding, my hope is that we

can strike a more receptive tone to financial innovation, in a way that enables a more innovative, efficient, and effective financial system for the future. 1 the views expressed here are my own and not necessarily those of my colleagues on the federal open market committee or the board of governors of the federal reserve system. 2 see michelle w. bowman, " remarks on the economy and prioritization of bank supervision and regulation ( pdf ) " ( speech at the new york bankers association's financial services forum, palm beach, florida, november 9, 2023 ) ; michelle w. bowman, " reflections on the economy and bank supervision ( pdf ) " ( speech at the florida bankers association leadership luncheon events, miami, florida, february 27, 2024 ) ; michelle w. bowman, " reflections on the economy and bank supervision ( pdf ) " ( speech at the new jersey bankers association annual economic leadership forum, somerset, new jersey, march 7, 2024 ). 3 see michelle w. bowman, " innovation and the evolving financial landscape ( pdf ) " ( speech at the digital chamber dc blockchain summit 2024, washington, d. c., may 15, 2024 ). 4 see u. s. department of the treasury, " the financial stability oversight council releases report on nonbank mortgage servicing, " press release, may 10, 2024. 8 / 8 bis - central bankers'speeches