Fed’s Bowman: Cumulative regulation is one of ‘greatest threats’ to community banks

One of the “greatest threats” to the community banking business model is the “cumulative impact” of new regulations and “changed expectations in supervision,” Federal Reserve Governor Michelle Bowman said today at the American Banker Association’s Conference for Community Bankers.

“The tendency of policymakers can be to add new regulations, guidance, and supervisory expectations, becoming more and more prescriptive and creating an ever-larger body of material that a banker must digest and apply over time,” Bowman said. “At some point, however, this overwhelming body of material (more than 5,000 pages just last year) is simply undigestible by the individual or small staff at a community bank primarily responsible for making sure the bank meets all relevant expectations.”

Bowman cautioned against simply adding to the quantity of risk factors evaluated by examiners. “More is not always better,” she said. “Prioritizing the quantity of findings over quality creates a serious risk of distracting bank management from core risks.”

She also warned about supervisory scrutiny of large bank mergers trickling down to community bank combinations, which “are often simpler than mergers of larger organizations and may be critical to preserve local banking options.” Because smaller banks “may have fewer options than their larger peers to raise capital or grow their banking business . . . preserving the availability of merger transactions is important for the health and longevity of community banking. In this context, application processing delays can be quite harmful, resulting in greater operational risk, increased expenses, and staff attrition due to the prolonged uncertainty.”

Bowman: Today’s rates ‘not restrictive enough’ to hit inflation target

During a Q&A with ABA Chair Julieann Thurlow, Bowman also discussed the economic outlook and considerations of the Federal Open Market Committee. Bowman noted several indicators of progress in bringing the inflation rate down while the economy remains resilient. “We’re pleased with that progress, but many risks remain,” she said, noting in particular geopolitical risks to global trade and energy markets.

As a result, she said, “it’s too soon to . . . measure or project when and how much we might be lowering the policy rate. I don’t see that in the immediate future.” When Thurlow commented that the monetary policy remains restrictive, Bowman responded (referring to the FOMC’s longtime inflation target), “Not restrictive enough to get us to 2%.”