The Federal Reserve will divide its bank supervision into five geographic regions rather than splitting it among the 12 Reserve Bank districts, which should enhance transparency and accountability, Fed Vice Chair for Supervision Michelle Bowman said today.
During a speech at the Community Banking Research Conference in St. Louis, Bowman announced plans to split supervision into five regions that follow state borders rather than the Fed districts. As for the reason, she cited a recent independent review of the Fed’s handling of the 2023 Silicon Valley Bank failure that concluded supervisors did not fully appreciate the extent of the vulnerabilities as the bank grew in size and complexity.
“The execution of Federal Reserve supervision is the responsibility of the vice chair for supervision, but it is conducted by the Reserve Banks,” Bowman said. “As the review noted, for decades that structure has disincentivized a critical link between responsibility and accountability and has been further complicated by a complex web of dozens of committees, resulting in dysfunction when critical decisions are most needed.”
Each new area will be led by a regional leader accountable for all supervisory activity, supported by the existing Reserve Bank footprints but aligned to state boundaries, Bowman said. She didn’t say which states the different regions would encompass, but that they would be informed by the regional structure of the Conference of State Bank Supervisors, which is split into five districts.
“By following state lines rather than Reserve Bank District boundaries, we can coordinate more effectively and efficiently with our state and federal regulatory partners,” Bowman said. “The regional structure creates scale in our operations. It simplifies our leadership structure while preserving local supervision by examiners. They will remain in the existing Reserve Bank locations across each region, continuing to oversee the banks they currently supervise. This approach clarifies accountability and decision-making and enables a consistent application of supervision.”
Re-examining community bank criteria
Bowman also used her speech to highlight several regulatory reforms pursued by the Fed in the past year and a half, most aimed at helping community banks. They include efforts to update and index outdated asset thresholds, to ease regulatory burdens hampering bank mergers and de novo bank formation, and to refocus bank supervision on risks that lead to material financial harm. In addition, she previewed possible changes to come.
“Later this year, the [Fed board] will consider broader structural reforms to bank portfolios defined by asset size and updates to the large bank tailoring framework,” Bowman said. “For the past 15 years, a community bank has been defined as a bank with assets of less than $10 billion. Fixed asset thresholds can push a smaller noncomplex bank into a higher supervisory tier with standards designed for more complex institutions and stronger supervisory scrutiny — like those based on the risk of their activities.”
“By expanding the range of institutions treated as community banks that operate using a traditional community bank business model and relationship banking and appropriately modifying the supervisory expectations and regulatory requirements for these firms, we will preserve safety and soundness while effectively applying appropriately tailored and risk-calibrated supervision and regulation,” she added.
ABA response
In a statement, American Bankers Association President and CEO Rob Nichols said ABA appreciates Bowman’s commitment to risk-focused regulation and supervision, and to continuing to modernize the bank regulatory framework.
“The changes to date, including the renewed emphasis on material risk, the updated community bank leverage ratio and the effort to update and index outdated asset thresholds will allow banks to focus on better serving their customers and communities,” Nichols said. “We look forward to learning more about how Vice Chair Bowman’s plan will strengthen overall supervision, as well as the practical effect it will have on our members.”
