FRB Governor Bowman Pushes to Strengthen Risk-tailored Bank Supervision
Commentary by Steven Lofchie
Federal Reserve Board ("FRB") Governor Michelle W. Bowman rejected arguments for "broad, fundamental reforms of the U.S. banking system" in favor of continuing "tailoring and risk-based supervision."
In remarks before the Texas Bankers Association, she agreed that "outsized regulatory requirements" will lead to bank consolidation and push more activities outside of the banking system. She warned that consolidation of the banking system would result in fewer banks serving few customers, with the losses especially felt in "communities [that] are not sufficiently served by large institutions."
Tailored Supervision
Ms. Bowman reiterated that risk-based supervision allows the FRB to (i) focus its supervisory efforts on areas that pose the greatest risk and (ii) recommend regulatory requirements and supervisory expectations in accordance with a bank’s size and complexity. In determining an appropriate response to the recent bank failures, Ms. Bowman stated that the FRB should engage a third party to conduct an independent internal review of the FRB and to analyze the events surrounding the banks’ failures. She also called on supervisors to "do a better job" of identifying key issues in their bank examinations so that bank management can remediate them. She said that while adjustments to the bank regulatory and supervisory framework may be necessary, regulators also need to be cautious of not creating more rules just because they failed to use the "comprehensive toolkit" already at their disposal.
In order to effectively supervise "traditional risks" within the banking sector, including credit, liquidity, concentration and interest rates, while also promoting innovation and competition, Ms. Bowman underscored a more transparent regulatory approach. She said that transparency will allow the FRB to achieve its objectives by providing clear expectations to banks. Ms. Bowman also emphasized the importance of due process, which she said requires engagement with bankers in order for examiners to understand and take appropriate action in response to supervisory concerns.
Commentary
Ms. Bowman argues that the banking regulators already have sufficient authority to detect and respond to bad management and that adding more regulations as a response to every management and regulatory failure is not a cure to management and regulatory failures. Her remarks may be read as a response to Senator Warren's position (see also Senator Warren press release) that the Trump Administration policy was the reason for the recent bank failures as opposed to inflation and bad management.
Ms. Bowman's discussion of the risks facing banks focuses on "traditional" banking risks, and makes no mention of non-traditional risks such as climate change. She previously expressed, in fairly gentle terms, that climate change is not a special risk, and that it is expected that banks would "manage their risks related to extreme weather events and other natural disasters." Given the recent run of bank failures, bank regulators should focus on traditional risks like interest rates, liquidity and financial risk management. See also FRB Governor Waller Says Climate-related Financial Risks Do Not Merit "Special Treatment".