More research and discussion is needed concerning regulatory thresholds for banks and the deposit insurance framework, Federal Reserve Gov. Michelle Bowman said Wednesday.
While speaking at a banking conference, Bowman emphasized the importance of an “evidence-based approach” to bank regulation — helping regulators understand policy reforms that affect community banks indirectly, like the regulatory requirements designed for bigger banks.
The Federal Deposit Insurance Corp. and the Conference of State Bank Supervisors are co-hosting the conference.
The banking sector weathered a turbulent span this year — triggered by the three bank failures in March and May.
The collapses underscore the need for evidence-based rulemaking to identify the precise problems and then craft targeted, efficient solutions through data analysis, Bowman said.
“Research and evidence-based rulemaking can insulate the banking system from wide swings in policy over time,” she said. “Bank failures demand scrutiny, but bank failures alone do not justify wholesale revisions to the bank regulatory framework.
"Before we undertake reforms intended to address issues that led to bank failures, we need to develop a comprehensive understanding not only of those root causes, but also of the costs and unintended consequences of potential reforms,” Bowman added.
Thorough research can help prevent overreactive regulation — particularly, ineffective ones that fail to precisely address systemic banking risks and challenges, she said.
Bowman questioned the long-accepted $10 billion-asset threshold used to define a community bank referenced in the Dodd-Frank Act.
“Are these asset size thresholds properly calibrated, and are the impacts, costs and benefits to institutions and to customers when banks cross these different thresholds rational? Are these thresholds creating the right incentives to promote prudent lending while appropriately balancing risk?” Bowman asked.
She pushed the need to move beyond the asset size thresholds when tailoring rules and consider business models instead.
Bowman stressed that further research on bank funding models and deposit infrastructure is warranted. As evident this year, money movement can pose unprecedented risks, so the framework must evolve to support modern technology-driven banking, Bowman said.
“Much like our competition framework, we need to ensure that the framework that we put in place today supports the banking system of tomorrow and not the banking system of yesterday,” she said.
Bowman cited the FDIC’s May report highlighting the deposit insurance program, and touched on unlimited or targeted deposit insurance coverage.
“This report, however, should not just serve as a call for policymakers to react to a narrow scope of options developed in reaction to a bank run crisis but should be seen as a call to the research community to provide evidenced research and analysis on these and other options,” she said.
Extensive shareholder engagement and public dialogue on evolving deposit practices are needed, along with community bankers’ insights that complement the study given their consumer experience and practical knowledge, Bowman said.
In her remarks, Bowman revisited her call to update and modernize the banking framework. She said bank mergers and acquisitions should not be seen as limiting community lending; instead, combining two financial institutions in certain markets might offer the only path for community banks to survive.
“The baseline assumption in our current framework is that credit unions do not compete with banks, and yet, just last month we saw five announced acquisitions of community banks by credit unions,” Bowman said. “Despite this trend, after a community bank has been acquired by a credit union, the resulting credit union is no longer viewed as a baseline competitor with other community banks in the market. I think it is fair to question whether this view is consistent with reality.”
Bowman suggested avoiding hasty reactions when considering policy issues.
“Policymakers should choose to exercise restraint and patience, consider the evidence and strive for well-calibrated policies that fully incorporate the costs, benefits and impacts of reform and complement, rather than complicate or contradict the existing regulatory framework,” she said.
