By Pete Schroeder
WASHINGTON (Reuters) -The Federal Reserve’s new top regulatory official on Friday laid out an ambitious agenda for revisiting and easing numerous bank rules and oversight policies which she argued have become onerous and unnecessary.
Michelle Bowman, who was confirmed to be the Fed’s Vice Chair for Supervision on Wednesday, said the Fed will be reconsidering how it writes rules and polices some of the nation’s largest and most complex banks. In prepared remarks, she argued that the influx of rules since the 2008 financial crisis merits reconsideration.
“Our goal should not be to prevent banks from failing or even eliminate the risk that they will. Our goal should be to make banks safe to fail, meaning that they can be allowed to fail without threatening to destabilize the rest of the banking system,” she said.
Bowman, who has served as a Fed governor since 2018, has long been critical of efforts to impose stricter rules on the banking sector. In her first remarks since being confirmed to the Fed’s top regulatory post, she said the Fed will soon launch numerous projects aimed at easing requirements and streamlining oversight, including in many areas that have been longtime targets for bank complaints.
Bowman focused a large portion of her remarks on changing bank supervision, as the industry has complained for years it is overly subjective and opaque, and penalizes firms for minor issues. Specifically, Bowman said the Fed will consider changes to the ratings it applies to large banks, noting that two-thirds of big banks were given unsatisfactory ratings by Fed supervisors even as they met all capital and liquidity requirements.
She said the proposed changes would address that “odd mismatch” by adopting a “more sensible approach” by reducing the weighting of some subjective ratings for banks that have demonstrated resilience. She also said the Fed will reconsider its ratings framework for smaller banks, to make sure they are primarily focused on material risks and not supervisory judgments.
“While judgment is a legitimate and necessary tool in supervision, it must always be grounded in the materiality of the identified issues as they relate to the financial health of each institution and the banking system as a whole,” she said.
Bowman also indicated the Fed would cast a critical eye on so-called “horizontal reviews,” where supervisors deeply examine numerous banks on a particular issue. She contended this approach can result in banks effectively being ranked against each other, and can ignore their unique individual characteristics in identifying shortcomings.
CAPITAL
She also indicated the Fed is preparing to take a wide-ranging look at its numerous capital and other rules directing banks to reserve sufficient funds against potential downturns.
She anticipated banking regulators would soon propose changes to large bank leverage rules that require firms to hold capital against assets regardless of risks. Banks have clamored for such changes for years, arguing the current requirement was meant to be a backstop but has grown binding, forcing banks to hold capital against effectively risk-free assets like U.S. Treasury debt.
Bowman also said the Fed will host a conference in July to explore other big bank capital requirements to explore whether the current framework is “operating as intended.”
In addition to the leverage rules, Bowman said the Fed will continue its efforts to make its annual “stress tests” of big banks more transparent and predictable, and also discuss changes to the capital surcharge applied to the largest global banks, as well as the contentious “Basel III endgame” effort to overhaul how banks gauge risk.
Bowman, who was a community banker earlier in her career, also floated the idea of adopting an independent supervisory and regulatory framework for smaller institutions, as a way to ensure they are not pressured to adhere to stricter rules aimed at bigger banks.
And she also suggested regulators or Congress should consider revising asset thresholds that assign increasingly stricter rules to banks based on their size. Those thresholds, first set in 2019, have not been adjusted, and Bowman suggested they could be indexed to inflation or growth as a more “durable” solution.
And, specifically, she said the current $10 billion threshold for defining a community bank is clearly too low and requires banks with simpler, relationship-based businesses to adhere to rules intended for larger, more complex firms.
(Reporting by Pete Schroeder; Editing by Chizu Nomiyama and Andrea Ricci)
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