U.S. banks need supervision rather than higher capital requirements, Federal Reserve Governor Michelle Bowman asserted Sunday.

The latter, she said, could impede bank lending and diminish competition. She called for an independent review of recent bank failures.

Speaking at a seminar in Salzburg, Austria, Bowman said the string of bank failures this spring, starting with Silicon Valley Bank, highlighted the need for regulators to come up with reforms that make the banking system stronger and more resilient.

“We need to consider whether examiners have the appropriate tools and support to identify important issues and demand prompt remediation,” Bowman said Sunday in a prepared statement. “Increasing capital requirements simply does not get at this underlying concern about the effectiveness of supervision.”

She pointed out that policies centered around factors not considering the failures of SVB or the related crisis could have bigger consequences.

“Misperceptions and misunderstandings about the root causes and related issues could result in changes that are not only unnecessary but result in real harm to banks and their customers, to the financial system, and to the broader economy,” Bowman said.

When policymakers raise the capital requirements, she noted, they focus almost exclusively on the perceived benefits, and that comes at a price — primarily, lesser credit availability and more cost of credit during normal times, which in turn can have a broader impact on the banks and the economy.

Higher capital requirements also could compel banks to push back from certain activities, thereby leading to less availability of certain products and services in the market. This could also surge concentration risks among competitors in certain product markets, Bowman noted.

“Bank regulators are not and should not be in the business of making capital allocation decisions regarding bank lending,” she said. “In the same way, bank regulators should also not direct bank business strategy about the products and services offered by establishing capital requirements that are disproportionate to risk,” the Fed governor added.

Bowman also pointed out that diverging from a risk-based approach to regulation and favoring a more uniform one could put the larger banks at an advantage compared with smaller and regional banks. This would generate a wave of mergers creating a “barbell” of banking institutions based on size, “with a small number of too-big-to-fail banks at the large end of the spectrum, and some smaller community banks at the low end,” she said.

“Instead of addressing the problem of too-big-to-fail banks, regulation could become a tool that insulates too-big-to-fail banks from competition from smaller competitors,” she noted.

Bowman’s remarks come at a time when the Fed prepares to release a set of regulatory changes this summer. The reforms are part of several initiatives the regulators are taking for more robust supervision, including the “holistic capital review” started by the Michael Barr, the Fed’s vice chair for supervision before the March-to-May failures and the final update to the long-awaited 2010 Basel III “endgame.”

Bowman has been critical of Barr’s findings since other board members were not able to clarify on it before the report was released to the public.

Bowman said there was room to improve supervision for large banks, specifically the Category IV institutions — those with assets between $100 billion and $250 billion. She stressed the need to evaluate whether the regulations could have inadvertently contributed to the stress in the banking industry.

“But these reform efforts should be both informed by an impartial and independent review of what led to the failures and healthy public debate, which should take into account the unintended consequences of reform. We must be circumspect about what went wrong, deliberate about what to fix, and cognizant of unintended consequences,” she said.

The Fed governor also called for an independent third-party review of the handful of recent bank failures and criticized the investigation carried out by the Fed itself. She raised concerns about whether the reviews provided an accounting of what led to the collapse of the banks. However, she said much of the work done has been helpful and brought to light some “uncomfortable realities” that led to it.

“But much of this work was prepared internally, by Federal Reserve supervision staff, relying on a limited number of unattributed source interviews, and completed on an expedited time frame with a limited scope,” Bowman said. “A supplemental, independent review would help overcome the limitations of scope and timing of these initial efforts, and address concerns about the impartiality and independence of the reviews.”