In a speech Tuesday, Federal Reserve Governor Michelle Bowman said she does not view undercapitalization of large banks as a current vulnerability of the U.S. financial system, adding that any argument using last year’s bank failures as justification for increasing capital standards “lacks a solid foundation.”
Federal regulators have proposed increasing capital standards for large banks as part of U.S. implementation of the Basel III endgame, with some advocates of the proposal citing last year’s failure of Silicon Valley Bank and two other institutions as a justification for the policy change. Bowman, speaking during an event in London, said there was no evidence that capital contributed to SVB’s failure or that undercapitalization is a broader problem in the banking system. She also raised concerns about the proposal in a speech at a different event on Wednesday.
“This argument seems to rely on the philosophy that more capital makes stronger banks, regardless of costs and tradeoffs, or possible more efficient approaches,” Bowman said. “Linking the proposed capital increases to the bank failures in the spring of 2023 should not be used as a pretext to avoid the challenges of identifying and evaluating the tradeoffs involved with setting capital requirements, nor should it excuse regulators from taking a hard look at the root causes of the bank failures with the goal of identifying more targeted solutions than across-the-board capital increases.”
Still, Bowman said there is “a path forward” for Basel III implementation if it reflects elements of the internationally agreed-upon standards rather than exceeds them. The next step in the rulemaking “should also be accompanied by a data-driven analysis of the proposal and informed by the significant public input received during the rulemaking process,” she said. “This should assist policymakers in creating a path to improve the rulemaking.”
