Fed Gov. Bowman discusses supervision and regulation of large banks

During an industry event today, Federal Reserve Gov. Michelle Bowman praised banks for their recent examples of resilience during the pandemic, and how recent supervision and regulation have contributed to a “safer, stronger, better capitalized” banking system.

Bowman’s comments primarily focused on what she called the Fed’s “incremental approach to ongoing refinements” in supervision and regulation and the critical issues relevant to large banks. “I am not opposed to changes that make sense, based on the experience we have gained from applying existing rules and approaches, or prompted by new and emerging issues,” she said, explaining that regulation and supervision must be nimble to address new safety and soundness risks but should always consider tradeoffs and potential unintended consequences.

Among the regulatory issues she cited for large banks were stress testing, mergers and acquisitions, resolution planning, cryptoassets and capital regulation—where much of her remarks were focused. Capital regulation was an area where requirements were “quickly bolstered without extensive analysis in response to the 2008 financial crisis,” she said, resulting in “redundant methods of calculating capital and demands that firms of all sizes and risk profiles comply with the highest requirements.” A one-size-fits-all approach was framed around the largest banks whose activities presented the most significant risks, ignoring bank size and business model.

Cautioning that “over-regulation can restrain bank lending,” Bowman emphasized that it’s important to think about capital “holistically,” which provides an opportunity to consider adjustments to the components of capital requirements for larger banks, such as the countercyclical capital buffer.

“While having releasable capital buffers shouldn’t necessarily be ruled out, in my view, after a decade of stress testing and recent real-life stress experience, we have seen that the existing level of capital requirements has proven to be adequate for banks to deal with significant stress,” she said. “Balancing safety and soundness with the need for appropriate risk-taking means that we should not simply assume that the further layering on of capital requirements, including through the application of the CCyB, would be beneficial.”