Fed Governor Says Regulators Need to Revise Community Bank Rules

Federal Reserve Governor Michelle W. Bowman urged banking regulators to consider a more flexible regulatory framework that better supports the unique characteristics of community banks. 

At a Federal Reserve Bank of St. Louis Community Banking Research Conference, which highlighted the partnership between the Federal Reserve, the Conference of State Bank Supervisors and the Federal Deposit Insurance Corporation, Governor Bowman called for:

• Revisiting community bank definitions. Ms. Bowman criticized the current reliance on fixed asset-size thresholds as outdated. She argued that these thresholds do not account for inflation and economic growth, often placing unnecessary regulatory burdens on smaller banks that do not pose systemic risks. Ms. Bowman urged regulators to focus on the bank's business model and risk profile, rather than a simple asset-size criterion.
• Understanding hidden costs of regulation and supervision. Ms. Bowman warned that supervisory guidance often functions as "de facto" regulation and creates hidden costs for community banks. She raised concerns that unclear guidance can cause confusion and increase compliance burdens, diverting resources from community banks' primary mission of serving their local economies.
• Addressing challenges in bank mergers and de novo bank formation. Ms. Bowman highlighted regulatory barriers that hinder both mergers and the formation of new community banks. She emphasized the need for an environment that allows for bank growth and new bank creation, especially in underserved rural areas. Ms. Bowman criticized the current regulatory framework as too slow and complex, which discourages both mergers and new entrants into the banking market.
• Improving federal and state regulatory coordination. Ms. Bowman urged better coordination between federal and state regulators to improve community bank supervision. She added that state regulators often have a more nuanced understanding of their community banks.
• More representation of community banking experience in federal regulatory bodies. Ms. Bowman argued that such experience provides valuable insights into the practical effects of regulation and helps ensure that policies do not disproportionately burden smaller institutions.
• Tailoring regulations for community banks. Ms. Bowman reiterated the need for tailored regulations that reflect the specific risks and business models of community banks. She warned that imposing the same complex requirements on small institutions as on large, systemically important banks undermines the viability of community banks and could harm local economies.