The Federal Reserve's top official for community banking issues wants banking agencies to rethink how they tailor their regulatory requirements to match banks' internal and systemic risk.
"There are certainly cases in which a bank with assets less than $10 billion faces risks that are disproportionate to its asset size, warranting greater supervisory scrutiny," Bowman said, arguing that such banks often focus on nontraditional business lines and complex activities. "At the same time, many banks with assets over $10 billion do operate like community banks, with a relationship-based straightforward business model, yet they are not regulated or supervised as such."
The remarks were part of a wide-ranging speech delivered Wednesday morning at the 2024 Community Banking Research Conference in St. Louis.
Along with her comments about definitional clarity, Bowman weighed in on the broader approach to community bank regulation and supervision. She also opined on her own role at the Federal Reserve Board of Governors, asserting that it should come with oversight responsibility for community bank regulation and supervision at the Fed.
Bowman was appointed to the board in 2018 by then-President Donald Trump to fulfill a
"This experience, of having worked as a banker or as a state regulator, is uncommon within the federal regulatory agencies," she said. "For example, of the current members of the Federal Reserve Board, I am the only member with experience as a banker or state regulator. In my view, we should ask how someone with this experience in the community banking system can best serve on the Board."
Specifically, she said the position would benefit from having more explicit responsibilities, such as occupying a seat on the Federal Financial Institutions Examination Council, or FFIEC, the group tasked with ensuring that various state and federal regulatory agencies take a harmonized approach to oversight.
She said "a more formal structure for this seat's responsibilities … would go a long way toward building and preserving an enduring framework that supports community banks in the future."
Before joining the Fed, Bowman worked as a vice president at her family's bank, Farmers & Drovers Bank in Council Grover, Kansas. She also served as state banking commissioner in Kansas for 22 months. After her initial term expired in 2020, she was confirmed to a full term on the board, which expires in 2034.
During her remarks, Bowman touched on various other elements of regulation and oversight. She restated concerns about
"Without viable formation and merger options for all banks, but especially for community banks, we will create a 'barbell' in the banking system," she said. "If this continues, it will eventually result in a handful of very large banks, and an ever-shrinking number of community banks, with nothing left in the middle. Over time, these trends will result in a reduction in available credit and services, an increase in the number of unbanked or underbanked communities, and economic harm."
Bowman also called for more supervisory clarity and accountability. Currently, she said, many supervisory policies aimed at addressing risks within larger banks are eventually pushed down toward lower banks. This migration is focused on banks pursuing "innovative" strategies, she said, and ultimately has a chilling effect on smaller banks attempting to differentiate themselves.
"If the 'cost' of adopting innovation results in a bank's inclusion in a higher compliance tier, it may be difficult to encourage greater investment in innovation for smaller banks," she said. "Establishing appropriate regulatory thresholds does not force regulators to eliminate or purge innovation from the banking system, especially among community banks."
