Federal Reserve Governor Michelle Bowman said today that she worried that “an overbroad application” of bank requirements could become a characteristic of future regulatory reforms, pointing to the proposed capital requirements as one example of the trend. During a speech to the South Carolina Bankers Association, Bowman called for a renewed commitment to the Fed’s congressionally mandated obligation to tailor regulation to institution size, saying that such a focus “helps us avoid the impulse to simply crank regulatory dials to their highest level for all firms.”
As an example, Bowman pointed to an interagency proposal to implement the Basel III “endgame.” The governor said that bankers have voiced concerns that the proposed capital requirements would be significantly higher than stakeholders anticipated, and that it would largely “flatten” the regulatory requirements for all banks over $100 billion, creating a severe cliff effect for firms approaching or crossing that threshold.
“While the capital proposal does not directly apply to regional and community banks, all banks are affected when policymakers shift away from or deemphasize tailoring,” Bowman said. “When we fail to recognize fundamental differences among firms, there is a strong temptation to continually push down requirements designed and calibrated for larger and more complex banks, to smaller and less complex banks that cannot reasonably be expected to comply with these standards. As we look to the future and the anticipated regulatory agenda for 2024, the critical role of tailoring must be incorporated as a foundational element of these regulatory reforms.”
