Michelle W Bowman: Fostering closer supervisory communication
Speech by Ms Michelle W Bowman, Member of the Board of Governors of the Federal Reserve
System, at the Conference of State Bank Supervisors, Washington DC, 2 April 2019.
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Thank you to the Conference of State Bank Supervisors (CSBS) for this opportunity to share my
perspective and some of my goals as a Federal Reserve Board governor on issues of interest to
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you and many in your states.
I emphasize that word "perspective" because the view from Washington can be very different
from how things look in your states and communities. No one knows that better than I do, of
course, because not so long ago, I was sitting where you are, enjoying the dinner provided by
CSBS and hearing the perspective from Washington. I'm still enjoying the dinner tonight, but find I
am now, so to speak, also on the menu. And in this position, as part of the Federal Reserve but
also still deeply rooted in my experience as a community banker and state regulator, I'll offer my
thoughts on forging a closer relationship and strengthening communication between the Board of
Governors and state banking commissioners.
First, to establish some context, let me say a few words about the Fed's role and perspective on
supervising community banks. The lion's share of community banks are those with total assets
of $500 million or less, with the Fed defining the sector as those with up to $10 billion in assets.
The Federal Reserve directly supervises 731 state-chartered community banks, which is only a
small share of the number of state-chartered banks overseen by CSBS members. The fact that
this is only a small share of the total might sound to some people like the Federal Reserve has
only a small role in community banking. But it's important to remember that the Fed is the
primary federal supervisor responsible for all bank and thrift holding companies, a total of 3,912.
This includes the vast majority of all community banking organizations. The Fed also influences
the supervision of all community and regional banks by developing both safety and soundness
and consumer rules to implement laws passed by Congress, applicable to insured depositories
and their holding companies. Typically this is done in collaboration with other federal agencies
and after seeking the public's input. I mention Congress and these other agencies to emphasize
that the Fed shares responsibility for writing and implementing federal regulations for community
banks.
Now, let me describe my role. In addition to my broader responsibilities in supervision and
regulation, I am Chair of the Board's Smaller Regional and Community Banking subcommittee,
which oversees our work in this area. I am also the Chair of the Board's committee tasked with
oversight of our rulemaking and supervision on consumer issues.
I also participate in carrying out the Federal Reserve's other responsibilities, such as conducting
monetary policy and overseeing the payment system. But it's fair to say that my background in
community banking was an important reason I was chosen and confirmed by Congress as the
first person to fulfill a new requirement that at least one governor have primary experience
working in or supervising community banks. My background and commitment to community
banking is also some important context for what I have to say about the Fed's interests in
improving communication with the members of CSBS.
I mentioned a moment ago that the perspective in Washington, and from the Board, can be
different from the view from your position as banking commissioners, and that is certainly true.
But one thing I have learned, since joining the Board in November, is that my fellow governors,
along with the staff at the Board, share your view, as I do, about the vital importance of
community banking and the essential role community banks play in our financial system.
Community banks are frequently the economic engines supporting and driving the economies of
many communities, especially in rural areas. In these communities, they are the primary
providers of financial services for individuals and small businesses, and a source of financial
advice and civic leadership. They play an indispensable role in areas not served by larger
institutions and in other communities of all different sizes, from urban to rural, serving a range of
customers, including some that are sometimes not as high a priority for larger banks.
I think it is important to note, and too often overlooked, that the vast majority of community banks
managed their risks well in the years leading up to and during the financial crisis and were not the
source of the excessive risk taking that caused the crisis. For this reason among others, the
Federal Reserve has been engaged in an active effort to tailor regulations, including those issued
in the wake of the financial crisis, to appropriately reflect the potential risk that an institution might
pose to financial stability.
I am pleased to see some evidence we are making progress. Last year's CSBS survey found
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that community banks reported a decrease in regulatory costs in 2017. This was the first
reduction in burden reported since the survey began in 2014. The decline was attributed to the
implementation of changes stemming from the recent review by the banking agencies under the
EGRPRA, the Economic Growth and Regulatory Paperwork Reduction Act of 1996. There has
been progress in tailoring regulations that affect community banks, and I believe more progress
lies ahead as we implement the changes that Congress included in S. 2155 and explore
additional opportunities to reduce burden while maintaining the resiliency and strength of smaller
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banks.
Before I go further, let me give a brief assessment of how community banks are faring. This
might seem like an issue that is primarily of interest to community bankers and regulators, but I
don't look at it that way at all. One of my most important responsibilities now is voting on the
monetary policy decisions of the Federal Open Market Committee, and that requires me to
closely and constantly monitor the health of the U.S. economy. And when community banks are
the source for more than half of all lending to small businesses, which together account for
twothirds of private sector job creation, then the health of community banking has a big influence on
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the health of the U.S. economy.
Since the financial crisis, the health of the community-banking sector has improved significantly.
Over those years and today, the large majority of community banks have maintained sound
levels of capital. Although the number of community banks in the United States continues to fall
due to consolidation, overall the sector continues to post strong earnings, which, in turn,
contribute to maintaining healthy capital positions. One measure of this strong financial position
is that no community banks failed in 2018. The shared responsibility we have as financial
supervisors to ensure the ongoing viability of community banks requires cooperation and
coordination. We must continue to ensure that the institutions we supervise are proactively
managing their risks to remain strong. It's our job to identify emerging risks to community banks
and to ensure bankers are identifying and managing their risks appropriately. We want to ensure
that loans are underwritten prudently and that bankers are actively managing the concentrations
of credit risk in their portfolios.
We welcome the strong lending growth that many community banks are experiencing, which is
fueling job creation and sustaining our economic expansion, which in July will become the
longest in U.S. history. But strong lending growth must be supported by prudent, well-managed
funding plans in order to manage the risk that strains on liquidity may arise more quickly than is
sometimes anticipated.
Now, let me turn back to my main theme today, which is fostering better communication between
CSBS and state banking commissioners and the Board of Governors. Improved communication
is a top priority for me for several reasons.
First, it is very much my approach to government service, and leadership in particular, to do a lot
of listening. A wise person once said that the most effective leaders do more listening than
talking. When I became Kansas' State Bank Commissioner, I started a twice-yearly series of
roundtables with the chief executives of banks across the state. It was an excellent way for me to
better understand the issues that were impacting bankers in a way that was less formal than
when banks comment on rules and less fraught than the supervisory process. Sure, it took time
away from the office, from consultation with the legislature, and the deadlines all of us have
faced. In my case, considering the size of Kansas, it was also time away from home and family.
However, I don't have to tell those of you who have also found a lot of merit in such tours that it is
an enormous advantage to find out what is on the minds of those in the field.
The second, very straightforward reason to foster better communication with all of you is that the
nature of financial regulation and supervision in the United States argues strongly for better
coordination. To a much greater extent than in other nations, in the United States financial
oversight is divided between the federal government and subnational authorities-the states. At
the federal level, responsibility is further divided between different agencies, such as the Fed, the
FDIC, the Office of Comptroller of the Currency, and the National Credit Union Administration.
This system evolved over time, and as things stand, there are some advantages to this
specialization. But this division of labor may, at times, inhibit information sharing, and as a
general principle, better communication can help overcome this challenge.
More specifically, better communication and information sharing between state banking
commissioners and the Federal Reserve can further improve the early identification and
resolution of emerging issues at community banks. Harnessing and sharing these sometimes
divergent views can serve to strengthen a financial regulatory system that shares responsibility
among many state and federal agencies. Better communication and information sharing will
benefit both you and the Federal Reserve, but my motivation is that the Fed has much to gain
here. Because states are responsible for chartering and co-supervising the large majority of
community banks, they can provide a broader perspective into local community banking issues
and trends.
Let me pause here for a moment and say that improving communication doesn't necessarily
mean that the Federal Reserve and the CSBS members will always agree. We won't, and
perhaps we shouldn't. A diversity of views can be a strength. A robust discussion requires a
thorough analysis of differing views, which leads to a more informed understanding of issues.
This healthy give and take is the fourth reason for better communication: It leads to better
outcomes.
I will cite one example that I know is on the minds of many of you-the rulemaking process the
agencies are currently engaged in on the community bank leverage ratio (CBLR). Here is an
excellent example of where it makes good sense to consult closely. I know you have a lot of
knowledge and expertise to bring to bear on this issue, which helps explain why Congress has
required the agencies to consult with the states. As you know, the Fed and the other agencies
are now gathering and evaluating comments on the CBLR and getting feedback on this
interagency proposal. So, now is a good time to re-engage. I am committed to re-engaging with
you on the interagency proposal and ways we might be able to improve it. I am eager to hear
your thoughts.
I have one more reason for better communication, but first I will give you an idea of what I have in
mind for that consultation. The formal means by which CSBS and others comment on a
rulemaking is important, but I think we would also all benefit from more informal, and more
frequent contact. If you have an issue, if you have something to say, just pick up the phone. It is
also my intention to be on the road a lot, visiting Federal Reserve Districts and talking to bankers,
consumers, and community groups. When I come to your state, I hope to see you, and I promise
to make time to talk.
My final reason for better communication brings me back to a point I made at the outset: the
United States needs a strong community-banking sector. We need strong community banks
because they help support strong communities. Strong communities are the building blocks of a
strong nation. They provide safety, education and economic opportunities, and help define the
values we hold dear. Community banks are vital to the success of communities. They help us
save and plan for a better future. The credit they extend helps preserve farming as a way of life
for American families, and provides the means for small businesses to start and to thrive, which
is so important to the health of communities.
This is not an abstract notion for me. As a community banker, I have seen how access to credit
and support from a financial institution with deep roots in a community can make a direct and
immediate difference in people's lives. I continued to feel that way when I did the job you do, as a
state banking commissioner, helping ensure that families and communities have access to
financial services that are so important to their success. I enjoyed being a community banker,
and I hope you know I've enjoyed working closely with all of you as a banking commissioner, and
I now look forward to building a stronger partnership between all of you and the Federal Reserve
Board.
Thank you for the opportunity to speak to you today. I hope to see you soon in your states, and I
wish you a productive and enjoyable visit to Washington.
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My views are my own and do not represent the view of the Board of Governors or its other members.
2
Federal Reserve System, Conference of State Bank Supervisors, and the Federal Deposit Insurance Corp.,
2018 Community Banking in the 21st Century (PDF) (Research and Policy Conference, October 3-4, 2018).
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Pub. L. No. 115-174, 132 Stat. 1296 (2018).
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U.S. Small Business Administration, Office of Advocacy, Frequently Asked Questions About Small Business
(PDF) (August 2018).