Federal Reserve Gov. Michelle Bowman said supervision and liquidity,
In a speech delivered Sunday in Austria, Bowman said the rash of
Crafting policy remedies around factors not relevant to the failure of Silicon Valley Bank or the ensuing crisis could have sweeping consequences, she said.
"Misperceptions and misunderstandings about the root causes and related issues could result in changes that are not only unnecessary but result in real harm to banks and their customers, to the financial system, and to the broader economy," Bowman said.
Bowman said higher capital requirements could force banks to abandon certain activities or put them at a competitive disadvantage to non-bank firms that face less regulatory scrutiny. She also noted that moving away from a risk-based approach to regulation in favor of a more uniform one could make it harder for smaller and regional banks to compete with large banks.
As a result, she said, such an approach could lead to a wave of consolidation creating a "barbell" effect on the banking industry, with a handful of large banks on one side and a collection of small institutions on the other. This dynamic, she said, would leave consumers with fewer choices while cementing the positions of the largest banks.
"My intuition is that this type of approach could become a self-fulfilling prophecy, as banks regulated like [global systemically important banks] would have strong incentives to grow or merge, to help develop economies of scale that come with larger size," she said. "Instead of addressing the problem of too-big-to-fail banks, regulation could become a tool that insulates too-big-to-fail banks from competition from smaller competitors."
Bowman's remarks come as the Fed prepares to roll out a set of regulatory changes this summer. The reforms are the result of several initiatives, including a "holistic capital review" initiated by the Fed Vice Chair for Supervision Michael Barr before this spring's bank failures as well as the final implementation of the Basel III international regulatory framework, known as the Basel III endgame.
Bowman said there was room to improve oversight for some banks, pointing to so-called Category IV institutions — those with between $100 billion and $250 billion of assets — but, she said, the focus should be making sure supervisors are able to spot issues on bank balance sheets and address them effectively.
"We need to consider whether examiners have the appropriate tools and support to identify important issues and demand prompt remediation," Bowman said. "Increasing capital requirements simply does not get at this underlying concern about the effectiveness of supervision."
Barr, who oversaw a six-week review of the issues that contributed to the failure of Silicon Valley Bank, has
Bowman has been a
She reiterated these concerns Sunday and repeated her call for an outside investigation into the episode.
"There is a genuine question whether these efforts provide a sufficient accounting of what occurred," she said. "A supplemental, independent review would help overcome the limitations of scope and timing of these initial efforts, and address concerns about the impartiality and independence of the reviews."
Bowman also called for a public hearing on any regulatory changes considered this year.
"A key element of the rulemaking process is openness and transparency," she said. "In the past, the Board has held public meetings to consider rules of significance. During the pandemic, the Board largely departed from this practice. I believe we should return to having more public, open meetings on matters of importance."
