Fed's Bowman: Regulators 'have not stepped up' to stop fraud

Bloomberg News

Federal Reserve Gov. Michelle Bowman said Friday morning that regulators need to revisit some of their regulations covering check fraud, particularly as it concerns smaller banks being defrauded by checks that originate with larger institutions.

Speaking at an executive leadership conference put on by the Missouri Bankers Association in Kansas City, Bowman said that the increased instances of check fraud in recent years should spur a more fulsome response from regulators. Bowman said Regulation CC — the implementing regulation for the Fed's process for clearing checks issued by banks — might be one appropriate venue for the central bank to consider making changes to address the problem.

"One thing we also talked about earlier is the growing risk of fraud," Bowman said. "I think that's an area where regulators have not stepped up and recognized that there is a goal for the regulatory environment to revisit some of our approaches, whether that's enhancing [Regulation] CC and ensuring that there's an opportunity for ... small banks to get some refunding of whatever their losses [were] from the larger bank of first deposit, or whatever that looks like."

Bowman went on to say that the Fed in particular should take the issue of check fraud seriously as the primary regulator of check clearing and the operator of one of the country's two Automated Clearing House rails. She added that other agencies, including law enforcement and the Postal Service, have a crucial role to play.

"There is an important conversation that needs to happen among the regulators — especially at the Fed, since we have a responsibility for check clearing," Bowman said. "Also, we need to be in constant discussions with law enforcement as well to ensure that we're identifying someone. The Postal Service really needs to step up their game from making sure that there isn't an opportunity for mail fraud in exacerbating this — particularly check fraud."

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Bowman also touched on monetary policy in her remarks, saying that she was skeptical that the current interest rate environment is still restrictive given the level of growth that the economy has been experiencing in recent months. Bowman was the lone member of the Federal Open Market Committee to dissent on the committee's half-point rate cut in September, arguing that a 25 basis point cut would have been more appropriate.

"If we're seeing inflation numbers continuing to kind of bounce around between 2.5% and 3%, that's not 2%, and I think it's important that we recognize that," Bowman said. "So especially as the U.S. economy remains strong, lowering the policy rate too quickly could unnecessarily stoke demand and potentially reignite inflationary pressures, which was another concern that I had at the time. So as we're looking forward and as I'm considering decision making within the FOMC context, I would prefer that we proceed cautiously and gradually in lowering the policy rate as inflation remains elevated."

Bowman also reiterated her concerns that regulations put forward in the last several years are having a negative cumulative impact on the smallest banks, particularly those concerning oversight of third-party risks. Bowman said the agencies should consider their mandate to tailor regulations to the size and risk profile of the bank, and to that end reconsider the thresholds at which banks must boost their compliance requirements, particularly the definition of a community bank as one with less than $10 billion of assets.

"That $10 billion threshold that we have for community banks, it might have seemed reasonable back in 2010-ish," Bowman said. "But what we've seen with inflation, with the amount of money that's been in the system based on all the COVID investments and programs, that $10 billion isn't the same thing that it used to be, back in 2010. 

"We really need to be thinking about what's the right threshold for a community bank with inflation. Is it $25 billion? Is it $50 billion?" Bowman continued. "Should we look at what business' services are, the complexity of the institution, and shouldn't we be — with all of our thresholds — indexing those to inflation and revisiting them over time, so that we make sure that the rules that we put in place 20 years ago are still relevant to the banks as they are today?"