Fed Governor Says Changes to Banking Regulations Should be ‘Targeted’

A Federal Reserve governor said changes to banking regulations should be “targeted,” not broad and fundamental.

Speaking Friday (May 19) at the Texas Bankers Association Annual Convention in San Antonio, Federal Reserve Governor Michelle Bowman said that as changes are made, decision-makers should be mindful of unintended consequences, according to a Federal Reserve transcript of the speech.

“The view that we extend the reach of overly complex and outsized regulatory requirements to banks that are smaller and less complex ignores some likely results — doing so will lead to bank consolidation and will potentially push banking activities outside of the regulated banking system,” Bowman said. “This could also lead to the elimination of all but the largest too-big-to-fail banks who would then be insulated from other competition.”

Moving forward after the failure of Silicon Valley Bank, the Federal Reserve should commission an independent third party to prepare a report to supplement the Fed’s own internal review, Bowman said.

Such a report would eliminate any doubts people might have about the Fed’s own self-assessment and should also be more wide ranging in terms of time and topics than was the internal review, Bowman said.

The Fed must also do a better job of identifying and remediating critical issues, as supervisors along with bank management neglected some in the case of Silicon Valley Bank, Bowman said.

Finally, policy makers should consider targeted adjustments to banking regulation, likely including the treatment of uninsured deposits and the current deposit insurance limits, Bowman said.

“We should avoid using these bank failures as a pretext to push for other, unrelated changes to banking regulation,” Bowman said. “Our focus should be on remediating known, identified issues with bank supervision and issues that emerge from the public autopsy of these events.”

The Federal Reserve’s review of the Silicon Valley Bank collapse was released in April.

On Tuesday (May 16), Federal Reserve Board Vice Chair for Supervision Michael S. Barr said in testimony delivered to a House committee hearing that the bank’s failure showed a need to strengthen supervision and regulation.

“Supervisors did not fully appreciate the extent of the vulnerabilities as SVB grew in size and complexity, and when supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that SVB fixed those problems quickly enough,” Barr said.