FRB Governor Bowman discusses the costs of excessive regulation for the banking sector

Federal Reserve Board (“FRB”) Governor Michelle W. Bowman shared her perspective on banking oversight and regulation and highlighted the costs of over-regulation. Ms Bowman argued that any changes to banking regulations should “provide a significant improvement in safety and soundness at a reasonable cost”, and said the FRB should “seek to avoid approaches that do not consider the trade-off between cost and safety.

Ms. Bowman’s remarks came during a speech to the Institute of International Finance in Washington DC, and cited four principles that guide her judgments about whether regulatory changes are appropriate: (i) ensure that banking regulation and supervision are transparent, consistent and fair; (ii) striking the right balance between promoting responsible innovation and ensuring safety and soundness; (iii) ensure effective regulation and supervision; and (iv) developing regulations that “serve[s] a legitimate prudential objective, such as promoting safety and soundness, or reducing risk to financial stability.”

Ms. Bowman then touched on a handful of topics important to banks and financial market participants in general.

Stress tests. Ms Bowman stressed the need for consistency in FRB stress testing among those being tested, taking into account the different business models and profiles of banks. She said the current stress-testing framework produces “year-to-year variations [that] are often not based on underlying changes in banks’ business models and [that] can create short-term capital management challenges. Ms. Bowman suggested ways to limit this volatility, such as averaging results over several years. She recommended that the FRB consider what it has learned from past stress tests, as well as industry feedback.

Capital. Ms Bowman said bank capital requirements had been “rapidly tightened without extensive analysis in response to the 2008 financial crisis”, resulting in a one-size-fits-all approach that forced smaller banks with lower risk profiles to meet the highest standards”. capital needs.” Ms. Bowman said that going forward, the right balance would have to be struck between banking and stability risks and the costs of excessive regulation. She pointed to the additional leverage ratio, the countercyclical capital and the anti-stress capital buffer as components of the capital requirements of FRB banks which should be reviewed.

Bank mergers. Ms Bowman stressed the need for transparency in the FRB’s review of bank mergers and acquisitions, and stressed that the FRB’s review of such mergers should pursue “legitimate prudential objectives”. Further, she said the FRB’s review of bank mergers must be “guided by the statutory factors mandated by Congress” and not influenced by other factors, such as “the idea that mergers are harmful or that increasing the size of banks is inherently problematic.” Ms. Bowman argued that the FRB’s merger framework works best when timelines and expectations for businesses are clear. She encouraged the implementation of a case-by-case analysis to address the specific risks posed by a given merger, with particular emphasis on changing markets, industry and client preferences when assessment of major bank mergers.

Resolution planning. Ms Bowman said the FRB should emphasize regulation rather than oversight when it comes to resolution planning or “living wills”. She said while she expects more changes to come, “fairness dictates that broad oversight powers should not supplant rule-making.”

Digital assets. Ms. Bowman underscored her view that “the goal of digital assets should be to match surveillance to risk and clarify surveillance expectations.” She stressed that the FRB should examine whether “banks have a stabilizing role to play in intermediation” and should ensure that competition from non-bank financial entities, among other market players, does not “create a risk for financial stability by pushing activities out of the market”. banking system.” Ms Bowman said banks should be allowed to participate in digital asset markets as long as “risks can be identified and managed appropriately and responsibly.”

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