FRB Governor Bowman Seeks "Targeted Change" Rather than Wholesale Reform in Wake of Bank Failures

Federal Reserve Board ("FRB") Governor Michelle W. Bowman acknowledged the "drumbeat calling for broad, fundamental reforms in response to recent bank failures," but argued for "targeted changes to address identified root causes of banking system stress," and against "radical reform of the bank regulatory framework".

In a speech before the 21st Annual Symposium on Building the Financial System of the 21st Century in Frankfurt, Germany, Ms. Bowman considered some of the factors that led to the recent run of bank failures. They include (i) the "ask for forgiveness, not permission" innovation culture at the failed banks, (ii) their over-reliance on uninsured deposits and (iii) social media. She said that recent bank failures do not demonstrate a need for significant changes to bank regulation and that no "efficient banking system can eliminate all bank failures," but argued that "well-designed and well-maintained systems can limit bank failures and mitigate the harm caused by any that occur."

Ms. Bowman recommended that the FRB:

  • use an independent third party to conduct an internal review of the failure of Silicon Valley Bank ("SVB") that, in comparison to the review conducted by the FRB, would (i) cover a longer time period before and after SVB’s failure and (ii) examine a broader range of topics beyond SVB’s regulatory and supervisory framework, such as operational issues, discount window lending, and SVB’s use of Fedwire services;
  • take steps to better identify the most salient issues of a bank and move quickly to remediate them, given that, as Ms. Bowman said, both SVB management and FRB supervisors failed to address "key, long-standing risk factors"; and
  • identify areas of banking regulation in need of related adjustments, while avoiding using the bank failures to push unrelated regulatory changes.

Ms. Bowman added that she is "extremely concerned" with the calls for rescinding tiering expectations for less complex institutions. She said that this would ultimately result in a banking system with less banks for less customers when the American economy relies on a "broad and diverse range of businesses supported by a broad and diverse range of banks."

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