FRB Governor Bowman Urges Return to Basics in Bank Regulation
Commentary by Steven Lofchie
Federal Reserve Board ("FRB") Governor Michelle W. Bowman urged banking regulators to prioritize their attention in the new year on (i) fundamental risks such as liquidity and interest rates; (ii) tailoring regulations to the size, complexity, and business model of institutions; and (iii) increasing "supervisory transparency."
In remarks before the South Carolina Community Bankers Conference, Ms. Bowman reviewed significant events in 2023, particularly the implications of the failures of major banks like Silicon Valley Bank and Signature Bank. Based on the lessons learned from the bank failures, she argued that regulators must renew their attention to safety and soundness, emphasizing that "supervision, when implemented effectively and appropriately, is the single most effective tool to support a safe and sound banking system." Governor Bowman advocated for a renewed focus on fundamental risks such as liquidity, concentration and interest rate risks, suggesting that recent regulatory attention had become "distracted from core financial risks, and instead focus[ed] on issues that are tangential to statutory mandates and critical areas of responsibility."
Governor Bowman warned against "an overbroad application of requirements—requirements that are not tailored—[and how they] could become a characteristic of future regulatory reforms." She noted concerns that the Basel III framework could "largely 'flatten' the regulatory requirements for all banks over $100 billion, creating a severe cliff effect for firms approaching or crossing that threshold." She emphasized that the "critical role of tailoring must be incorporated as a foundational element" of future regulatory reforms.
Ms. Bowman also called for greater "supervisory transparency" in standards and expectations. She noted concerning trends in 2023 that included reports that some "supervisory actions were excessive in light of the risks posed by some smaller institutions." She highlighted the need for banks to be well-informed about regulatory requirements and expectations in advance to prevent "supervisory surprises."
Commentary
This speech is an indication that at least some of the most important bank regulators may be returning their attention to financial risk and away from climate risk (see also FRB Governor Waller Says Climate-related Financial Risks Do Not Merit "Special Treatment."). That is a positive development, but not yet the norm. To a remarkable extent, bank regulators remain distracted, continuing to focus on climate risk after a year in which there were major bank defaults caused by plain-old-fashioned-boring inflation and interest risk. (See, e.g., Bank Regulators Issue Guidance on Managing Climate Risk.)