Fed's Bowman: Bank merger reviews are taking too long

Federal Reserve Board Gov. Michelle Bowman thinks bank merger application reviews are taking too long.

"Recently, we have seen an increase in average processing times in the merger review process," Bowman said in a speech delivered Monday morning. "I am concerned about delays in the [merger] application process and am concerned that the increase in average processing times will become the new normal."

Bowman sits on the Board of Governors' committee on supervision and regulation. She is a frequent advocate for transparency in the supervision process and limited regulatory intervention, especially for community banks. 

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In her remarks, which were delivered at the American Bankers Association's Community Banking Conference in Orlando, Bowman said she expected "meaningful changes in regulations, guidance, and supervisory expectations over the coming year." In doing so, the Fed should emphasize its independence from outside influence and strive for uniformity across institutions while also tailoring rules to be less onerous on smaller institutions, she said.

Bowman's comments come as the central bank joins the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Justice Department in reviewing their bank merger protocols for the first time since 1995. 

Bowman has previously argued that the review should allow for the consideration of nontraditional bank competition when determining the impact of potential mergers, particularly those involving community banks. She points to the rise of credit unions and online banking platforms as ways in which the landscape has shifted in recent years. She has also argued that similar activities should receive the same regulatory oversight, even if they are taking place outside the regulated banking system.

In her speech Monday, Bowman cited the Fed's most recent semiannual report on banking application activity, which was released in December. The report noted that, among applications that received adverse public commentary before being approved in the first half of last year, the average processing time was 197 days, up from 186 days in 2021 and 113 days in 2018.

She said there are "significant consequences" for banks when their merger applications are not acted on swiftly, including "increased operational risk, the additional expense associated with running two institutions in parallel over a longer period of time, employee retention issues, and perceived reputational risk."

She said the Fed could reduce the recent delays by implementing more transparency around the merger review process and by rethinking when and why applications are passed on from the regional reserve banks to the Board of Governors. 

Bowman also reiterated her stance that the merger review process has become a tool for regulators to apply certain conditions on banks that have not been codified through a traditional rulemaking process. Ending this practice would go a long way toward speeding up decisions, she said.

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"I continue to believe that the application process should not be used as a substitute for rulemaking," she said. "If the rules applicable to a firm or group of firms needs to be updated, we should follow the rulemaking process to update those rules."

Bowman also addressed the Fed's ongoing holistic capital review — a lynchpin of the institution's regulatory agenda under the leadership of Vice Chair for Supervision Michael Barr — saying it was important for the Board to adhere to its tailoring principles as it makes the final adjustments for the so-called Basel III endgame. The Fed has signaled that it will put the finishing touches on its policies to adhere to the international regulatory accord at some point this year.

"While I expect the Board will propose new capital requirements for the largest institutions, including the Basel III 'endgame' reforms, I do not expect every tier of firms to be subject to the same changes," she said. "And my understanding is that there are no plans to propose changes to the community bank capital framework as part of this capital review."

She added that the current capital framework for community banks, including the leverage ratio that they must adhere to, is "functioning well."

On the topic of independence, Bowman said it was important for the Fed to remain insulated from political pressures, including those that would have the central bank steer banks away from certain types of activities, namely lending to fossil fuel companies. 

The question about how bank regulators should view and respond to risks associated with climate change has been a hot topic in Washington. Comments made by Sarah Bloom-Raskin, the Biden administration's first pick for Fed vice chair for supervision, about denying oil companies access to emergency lending facilities early in the pandemic helped sink her nomination last March. 

Bowman said that, while it is appropriate for the Fed to adapt to changing risk factors in the banking sector, the central bank should not go so far as to block banks from any particular lines of business.

"If you look across the regulated banking sectors, you will find that each bank makes different credit decisions, reacting not only to market demand and economic conditions, but also implementing the bank's strategy," she said. "And to be clear, I share the widely held view that the appropriate role of the Federal Reserve is not to make credit allocation decisions for banks."