Regulatory reforms should promote a healthy banking system and acknowledge the important role that mergers and acquisitions play in helping the system stay that way, Federal Reserve Governor Michelle Bowman said Saturday. Speaking at a Kansas Bankers Association summit, Bowman also reiterated her concerns about proposed liquidity reforms in response to last year’s bank failures.
When it comes to mergers, Bowman said that bankers and bank regulators are “living in different worlds.” Bankers seek to conclude the process in a timely way, with a lack of timely regulatory action a key risk.
“In contrast, some regulators feel pressure to revisit well-established regulatory approval standards relating to statutory factors, such as the effect of a transaction on competition, or to even expand the use of M&A review to accomplish other objectives, like forcing banks to adopt regulatory standards that would not otherwise apply by regulation as a condition of approval,” Bowman said.
Bowman countered arguments that regulators “rubber stamp” proposed mergers. “Federal Reserve data support the view that even for the self-selected population who files an application, the process does not always lead to approval,” she said. “To the contrary, based on the most recent data reported for 2023, a significant portion of M&A applications were withdrawn before approval, and the average processing time in the second half of 2023 was 87 days. The number of approved M&A transactions was also significantly lower in 2023 than it was in 2020, 2021 or 2022.”
As for bank liquidity regulation, Bowman was skeptical of a proposal to require banks to preposition collateral at the Fed’s discount window, saying its benefits “remain to be seen.” However, other reforms, such as encouraging bank readiness to borrow from the discount window if that is part of banks’ contingency funding plans, could be explored more thoroughly, she said.
“When it comes to the next steps in liquidity reform, it is imperative that we tackle known and identified issues that were exposed during the banking stress last year,” Bowman said. “This must include updating discount window operations and technology and making sure that payment services are available when needed. But for other reforms, a number of important questions remain unanswered, including understanding both where there are frictions and weaknesses in the current bank funding landscape, and what the potential impact—including intended and unintended consequences—of these reforms on the banking industry could be.”