Regulators should rethink whether the current supervisory thresholds for banks remain adequate or whether those metrics should be instead be based on a bank’s business model, activities and risk profile, Federal Reserve Governor Michelle Bowman said today.
Speaking at a community banking conference in St. Louis, Bowman noted that the Fed has distinct portfolios that oversee community, regional and four categories of larger banks, based primarily on asset size. That approach has its virtues, but it also has costs, she said.
“Over time, these fixed thresholds fail to take into account growth attributable to broader economic growth and inflation,” Bowman said. “They are also not reflective of any changes in a particular bank’s activities or risk profile. As a result, many firms that are stable in their growth, business model and risk profile end up unintentionally crossing regulatory thresholds.”
A community bank under the Fed definition is one with less than $10 billion in total assets. But Bowman said that many banks with more than $10 billion operate like community banks, yet they are not regulated or supervised as such.
“When considering building a framework to support community banks, the definition is key—which banks will be in scope?” Bowman said. “The answer lies in the bank’s business model, activities and risk profile.
“Where we have established fixed-dollar asset thresholds, we must commit to revisit and adjust them as needed,” Bowman added. “In my view, this is a principle that extends beyond the lines defining community banks to all regulatory and supervisory thresholds. While there is a need for flexibility in both directions, it is apparent that over time economic growth and inflation will result in thresholds that are inappropriately low.”
