In an interview on CNBC, Federal Reserve Vice Chair for Supervision Michelle Bowman spelled out her approach to reforming capital requirements for large banks, saying it was time to evaluate what has and hasn’t worked since passage of the Dodd-Frank Act.
The Fed today is holding a conference on capital requirements for large banks. A previous attempt by the Fed and banking agencies to implement the Basel III endgame standards failed amid worries about the proposal’s effects on the economy. Bowman said regulators are still pushing forward to implement some form of Basel III along with regulations concerning the global systemically important banks surcharge and stress tests.
“We realized that we’re 15 years past the financial crisis and the implementation of the Dodd-Frank regulations, and it’s time for us to take a look backwards to understand what’s been working, what isn’t working, what’s duplicative and overlapping, and how we can have a more comprehensive review of what those capital regulations are,” Bowman said.
The Fed under Bowman has also initiated a review of its supervisory rating framework for large banks. The current rating framework includes three components — capital, liquidity, and governance and controls — and a negative finding in any of them can lower a bank’s rating. The Fed is proposing to amend the framework by allowing a bank with no more than one “deficient-1” rating for a component to still be rated “well managed.” (Banks with any “deficient-2” ratings would still be considered “not well managed.”)
“When you have three components and two of them are related to their financial condition and one is related only to their operations and no other financial factors, it doesn’t make sense that we would allow nonfinancial factors on their own to degrade a bank’s financial standing,” Bowman said.
