WASHINGTON—Michelle Bowman, the Federal Reserve's newly appointed vice chair for supervision, recently detailed plans to reduce regulatory burdens on banks, including possible revisions to capital requirements and oversight of bank mergers.
“Both regulators and legislators should consider whether the bank regulatory framework includes appropriate thresholds for defining distinct categories of institutions, and whether simple fixes—for example the indexing of thresholds to inflation or growth—could better ensure a sound, tailored approach that remains durable over time,” Bowan stated in a speech delivered at Georgetown University. “It is clear that the current $10 billion threshold defining the upper bounds of a "community bank" leaves many institutions that pursue this business model—of community and relationship-based banking—subject to heightened requirements more suitable for larger and more complex firms.
To further those objectives, Bowman said later this year she will host a conference on small and community bank issues, to discuss improving the bank regulatory framework to adopt a more efficient, tailored approach for these firms.
“We must demonstrate wisdom and courage by carefully listening to those who are subject to regulatory oversight and considering ways to enhance our approaches to both supervision and regulation,” she said.
One issue that continues to present challenges to smaller banks is check fraud, Bowman emphasized.
Bank Losses
“The ongoing increase in bank losses to this type of fraud can negatively impact the perceived safety of the banking system and result in significant consumer harm. Past efforts by regulators have been frustratingly slow to advance and seem to have done little to address the underlying root causes of this increase in fraud,” she said. “I will continue to work to identify specific actions that can be taken to reduce the incidence of fraud, including through expediting the remediation process from check fraud after it occurs. I expect that the Federal Reserve, in coordination with the OCC and FDIC, will soon take action on this front.”
Bowman stressed that ratings must reflect risk.
“And yet we have seen gradual changes in supervisory approaches that have eroded the link between ratings and financial condition,” she said. “Federal Reserve supervisory statistics show that that two-thirds of the largest financial institutions in the U.S. were rated unsatisfactory in the first half of 2024. At the same time, the majority of these same institutions met all supervisory expectations for capital and liquidity.
“This odd mismatch between financial condition and supervisory ratings requires careful review and appropriate revisions to our current approach,” continued Bowman. “Under the current large bank ratings framework, a single component rating can result in a firm being considered not ‘well-managed,’ which has driven the disparity between well-managed status and financial condition.”
Bowman said the Federal Reserve will soon begin to address this mismatch, by proposing changes to the Large Financial Institution ratings framework.
“The proposed changes will be designed to result in a more sensible approach to determining whether a firm is well-managed, no longer disproportionately weighting a single framework component for a firm that has demonstrated resilience under a range of conditions and stresses,” she said.