Federal Reserve Gov. Michelle Bowman offered her perspective
on the implications of recent bank failures and stress within the U.S. banking
system while speaking at a recent conference sponsored by the Mississippi
Bankers Association and the Tennessee Bankers Association.
Bowman said the three bank failures in March underscored the
need for the Fed and other federal banking regulators to address supervisory
deficiencies and consider revisions to certain regulations intended to ensure
safe and sound practices among supervised depository institutions.
She emphasized that any proposed reforms should focus on
rectifying identified issues and be based on reliable data and analysis. Such
reforms, she continued, also should involve genuine debate among policymakers
within the relevant agencies in an open, transparent manner tailored to allow
the public to understand the context and reasoning behind proposed reforms,
while soliciting meaningful public input on the matter.
“I have previously noted my perspective on the path forward,”
Bowman said, “that proposals should be (1) focused on remediating identified
issues and shortcomings; (2) informed by data, analysis, and genuine debate and
discussion among policymakers within each of the participating agencies; and
(3) developed through a transparent and open process that allows policymakers
and the public to understand the context, data, and analysis underlying the
proposed reforms.”
Reports assessing the root causes of the failures of Silicon
Valley Bank (SVB), First Republic and Signature Bank, including a recent report
from the Fed’s Office of the Inspector General, have offered useful insight but
Bowman asserted more work needs to be done to fully understand all the factors
contributing to these bank failures. She noted existing reports have not
reached entirely consistent conclusions and independent third-party reviews
could yield more definitive results.
“One way to effectively identify and address these issues is
to engage an independent third party to conduct a review,” Bowman said. “As I
have said since shortly after the bank failures occurred, a third-party review
should review and analyze a broader time period than the limited time periods
covered to-date, including a broader range of topics and issues that are likely
to identify further areas in need of reform. While this type of review would be
an unusual step, it is appropriate where, as here, the existing limited reviews
are driving the regulatory reform agenda, and where these bank failures have
caused significant losses.
“Put another way, the purpose of an independent third-party
review would be to analyze the events surrounding the failure of these banks,
so that we can fully understand what led to the failures,” she continued. “This
would be a logical next step in holding ourselves accountable. Before making
conclusions about appropriate responses going forward to address causal issues,
we need accurate, impartial, and thorough information to inform the debate
about what specifically may be needed to fix any problems in our supervision
and regulatory framework.”
Internal reviews led by Fed Vice Chair for Supervision Michael
Barr and the Office of the Inspector General benefitted from greater access to
internal information but were limited in scope due to time constraints and
specific questions investigated.
“While the reports produced to-date have provided some
insights, it is worth pausing and reflecting on whether we have our regulatory
and supervisory priorities aligned with the most pressing needs demonstrated by
recent events, and whether we are taking the right ‘lessons learned’ from these
events,” Bowman explained. “As regulators continue to pursue further
supervisory and regulatory reforms, we should also pause and reflect on whether
these changes are appropriately calibrated and executed.
“To be clear, supervisory priorities have already been
influenced by the bank failures earlier this year. The trend seems to be that
regulators are engaging in supervision with a more heavy-handed approach,
focusing primarily on quarterly call report data in some cases without the
benefit of direct engagement with the targeted financial institutions,” she
added.
Bowman suggested evaluating the consistency of federal
banking agencies in their supervisory activities and their coordination with
state banking agencies when reviewing state-chartered banks. Furthermore, she expressed
concerns about supervisory decisions being driven by comparisons among
institutions with varying business activities and risk profiles, potentially
leading to overreactions and negatively impacting communication between banks
and examiners.
When assessing the appropriateness of the current
supervisory approach in the banking industry, Bowman said interested parties
should be asking some specific questions:
·
“Are the federal banking agencies acting in a
consistent manner in their bank supervisory activities?
·
“Are federal banking agencies coordinating
appropriately with state banking agencies when reviewing state-chartered banks?
·
“And fundamentally, are supervisory decisions
being driven by a comparison or horizontal review of differences among
institutions that may have very different business activities and risk
profiles?
·
“Are supervisors acting pro-cyclically, or
overreacting to the events of March 2023?
·
“When agencies adopt a more adversarial approach
to supervision, or apply standards that are disproportionate to risk, does that
negatively impact a bank’s ability and willingness to engage in open
communication with their examiners?”
She further said a thoughtful and calibrated approach to
banking supervision that considers all available tools, relevant factors and
the unique circumstances of each institution would avoid disproportionate
reactions and foster open communication in the banking sector.