Fed’s Bowman questions need for higher capital requirements for banks

New capital requirements for financial institutions could unnecessarily hinder bank lending and diminish competition, Federal Reserve Governor Michelle Bowman said Sunday during a financial conference in Austria. In her remarks, Bowman expressed skepticism about calls for tougher capital standards following the recent bank failures. Her comments came a few days after FDIC Chairman Martin Gruenberg suggested the failures may lead to stronger capital requirements for banks between $100 billion to $250 billion in size. He also dismissed criticism that higher standards could be a potential drag on the U.S. economy.

Regulators are expected to soon propose rulemaking on a new framework finalizing the Basel III capital standards. Bowman said she plans to approach the proposal with an open mind. “When policymakers raise capital requirements, the tendency can be to singularly focus on the perceived benefits—higher capital implies greater resiliency of the banking system,” she said. “But there’s a tradeoff. Resiliency, in terms of higher capital, comes at a cost—namely, decreased credit availability and increased cost of credit in normal times—and can have broad impacts on banks, the broader financial system, and the economy.”

At the same time, she noted that the U.S. banking system is strong and resilient, which raises questions about the need for higher capital requirements. “We need to consider whether examiners have the appropriate tools and support to identify important issues and demand prompt remediation,” she said. “Increasing capital requirements simply does not get at this underlying concern about the effectiveness of supervision.”

Still, Bowman stressed that her remarks should not be interpreted as a categorical rejection of reform efforts. “Some reform efforts—to both regulation and supervision—are a natural part of the evolution of the regulatory framework, and some would address weaknesses revealed by the recent bank failures… But these reform efforts should be both informed by an impartial and independent review of what led to the failures and healthy public debate, which should take into account the unintended consequences of reform.”