Michelle W Bowman: Brief remarks on the economy, monetary policy,
and bank regulation
Brief remarks by Ms Michelle W Bowman, Member of the Board of Governors of the
Federal Reserve System, at the Pennsylvania Bankers Association 2024 Convention,
Nashville, Tennessee, 17 May 2024.
* * *
I would like to thank the Pennsylvania Bankers Association for the invitation to join you
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today. I appreciate the opportunity to engage with you on matters that affect the
banking industry. Before sharing my thoughts about the current bank regulatory
environment, I will discuss my views on the economy and monetary policy.
Update on the Economy and Monetary Policy Outlook
Over the past two years, the Federal Open Market Committee (FOMC) has significantly
tightened the stance of monetary policy to address high inflation. At our meeting earlier
this month, the FOMC voted to continue to hold the federal funds rate target range at
51/4 to 5-1/2 percent and to continue to reduce the Federal Reserve's securities
holdings, but at a slower pace beginning in June.
After seeing considerable progress on slowing inflation last year, we have not yet seen
further progress this year. The 12-month measures of total and core personal
consumption expenditures (PCE) inflation have moved roughly sideways since
December and remained elevated at 2.7 percent and 2.8 percent, respectively, in
March. With average core consumer price index (CPI) inflation this year through April
running at an annualized rate of 4.3 percent, well above average inflation in the second
half of last year, I expect inflation to remain elevated for some time.
The recent pickup seems to be evident across many goods and services categories,
suggesting that inflation was temporarily lower in the latter half of last year. Prices
continue to be much higher than before the pandemic, which is weighing on consumer
sentiment. Inflation has hit lower-income households hardest since food, energy, and
housing services price increases far outpaced overall inflation throughout this episode.
Economic activity increased at a strong pace last year but may have moderated early
this year. First-quarter gross domestic product growth was temporarily dampened by
volatile categories, like inventories and net exports, and over the past few months,
including recent data revisions, consumers appear to have pulled-back on goods
spending through April. Still, consumer services spending has remained strong, and
residential activity and business investment in equipment and intangibles strengthened.
So far this year, payroll employment has increased at a strong pace through April, partly
reflecting increased immigrant labor supply. Although we have seen signs that the labor
market is coming into better balance, progress has slowed. Recent employment reports
continue to show a tight labor market, and the unemployment rate remains below 4
percent, with the number of job openings relative to unemployed workers still above its
pre-pandemic level. Throughout last year, the average pace of job gains slowed, and
the labor force participation rate rose, but in recent months, job growth has rebounded.
Labor force participation flattened out around last year's peak, which suggests no
further improvement in labor supply along this margin, as labor force participation
among those aged 55 and older has been persistently low.
At its current setting, our monetary policy stance appears to be restrictive, and I will
continue to monitor the incoming data to assess whether monetary policy is sufficiently
restrictive to bring inflation down to our target. As I've noted recently, my baseline
outlook continues to be that inflation will decline further with the policy rate held steady,
but I still see a number of upside inflation risks that affect my outlook.
First, much of the progress on inflation last year was due to supply-side improvements,
including easing of supply chain constraints; increases in the number of available
workers, due in part to immigration; and lower energy prices. It is unclear whether
further supply-side improvements will continue to lower inflation. Geopolitical
developments could also pose upside risks to inflation, including the risk that spillovers
from regional conflicts could disrupt global supply chains, putting additional upward
pressure on food, energy, and commodity prices. There is also the risk that the
loosening in financial conditions since late last year and additional fiscal stimulus could
add momentum to demand, stalling any further progress or even causing inflation to
reaccelerate.
Finally, there is a risk that strong consumer demand for services, increased
immigration, and continued labor market tightness could lead to persistently high core
services inflation. Given the current low inventory of affordable housing, the inflow of
new immigrants to some geographic areas could result in upward pressure on rents, as
additional housing supply may take time to materialize. Wage growth has remained at
an elevated rate of about 4 to 5 percent, still higher than the pace consistent with our 2
percent inflation goal given trend productivity growth.
In light of these risks, and the general uncertainty regarding the economic outlook, I will
continue to watch the data closely as I assess the appropriate path of monetary policy.
The frequency and extent of data revisions over the past few years make the task of
assessing the current state of the economy and predicting how the economy will evolve
even more challenging. I will remain cautious in my approach to considering future
changes in the stance of policy.
It is important to note that monetary policy is not on a preset course. My colleagues and
I will make our decisions at each FOMC meeting based on the incoming data and the
implications for and risks to the outlook. While the current stance of monetary policy
appears to be at a restrictive level, I remain willing to raise the target range for the
federal funds rate at a future meeting should the incoming data indicate that progress
on inflation has stalled or reversed. Restoring price stability is essential for achieving
maximum employment over the longer run.
Bank Regulatory Reform
Turning to the bank regulatory reform agenda, there has been a significant volume of
matters that have recently been completed, that have been proposed, and that are in
the pipeline. A number of these efforts have been met with criticism and public
resistance, from informal comments and ad campaigns to formal legal challenges,
including litigation challenging the validity of these reforms. Reasonable minds can
disagree on the appropriate path forward for bank regulatory policy, but the current
period of regulatory reform feels more contentious than in the past.
The current regulatory agenda is notable for its broad scope, both for the institutions
that would be subject to reforms, and the nature of the reforms. The proposals touch on
a wide range of topics that directly or indirectly impact banks of all sizes. And they often
represent significant shifts in regulatory requirements and supervisory expectations. My
remarks today highlight two themes related to the significant number of regulatory
changes and proposals under consideration.
First, the volume and scope of revisions affect a wide range of banking activities and
pose significant challenges for all bankers. Reviewing, understanding, and then
implementing these reforms will involve bank management, compliance, legal, audit,
and even frontline staff. At the same time, banks must also balance the existing and
ongoing compliance obligations to meet supervisory expectations. Compliance has
always been an important bank function, and it often involves a shared responsibility
and obligation across many different business lines and personnel. Simply keeping up
with the thousands of pages of new regulatory reforms poses a significant challenge,
especially for banks with small staffs and a single compliance officer.
Those same staff members, with already heavy compliance responsibilities, are also
often best positioned to provide feedback on pending regulatory proposals. Banker
comments shared as part of the administrative rulemaking process help inform and
influence proposals that are under consideration. If there is a desire to influence
change, stakeholders must engage and provide input during this process.
Second, the large number of finalized, proposed, and potential changes suggest a lack
of prioritization-whether we have effectively identified actual risks to the banking system
and devoted resources to the most pressing of these issues. Prioritization is something
I have spoken about at length in the past, and it remains just as critical today.2
The banking stress last spring revealed the presence of flaws and shortcomings in our
bank regulatory and supervisory framework. A lack of prioritization in our approach risks
losing focus on making substantively responsive adjustments and reforms.
Opportunities for Engagement
Reviewing and commenting on regulatory proposals should never be a distraction from
a banker's core responsibility to ensure the bank continues serving its customers in a
safe and sound manner, and in compliance with applicable laws. So, I do not want any
of you to take my remarks today as a call to drop everything you are doing and open up
the Federal Register and start reading. The banking system is a highly regulated
environment, and as you see in your work every day, requires banks to devote
significant resources to compliance. A strong culture of compliance can help keep your
bank safe, and in the aggregate promotes a safe and sound banking system. Within a
bank, virtually everyone has a role to play in promoting that culture of compliance with
applicable law, all while serving your customers.
But stakeholders, including bankers, have an important role in the stewardship of the
banking system that goes beyond compliance-namely, participating in the
administrative rulemaking process. It is critical that you share your views with
policymakers on regulatory reform proposals. All the comments, data, and analysis from
commenters enable policymakers to make informed decisions throughout the
rulemaking process, from the initial brainstorming stage, through the creation of a
proposal, and in crafting a final rule.
This feedback is equally critical in understanding how the supervisory process is
working as it evolves over time and incorporates new standards and expectations.
Information about the intended and unintended impacts of reform initiatives is especially
informative. Often, private-sector stakeholders are best positioned to understand and
explain these impacts, and to identify gaps in the context, data, and analysis
underpinning these initiatives.
I recognize that in some instances, multiple, interrelated proposals out for comment at
the same time complicate or even frustrate the ability to provide meaningful feedback.
For example, the federal banking regulators have proposed significant reforms to
capital requirements, while also proposing new long-term debt requirements for banks
with over $100 billion in assets. While these efforts are on their face distinct, the
calibration of such requirements are directly linked. The calibration of capital
requirements is used to set long-term debt requirements. Therefore, these proposals
present challenges not only to regulators, but also to public commenters trying to
understand the potential and complete impact of reforms. Even so, I strongly encourage
your participation to inform the rulemaking process.
I will share my views on a few of these proposals, but I certainly do not mean to suggest
that this list is exhaustive. All the proposals could benefit from public feedback.
Bank Mergers and Acquisitions
Some prudential regulators and other policymakers are currently reconsidering the
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approach to the review and approval of bank mergers and acquisitions (M&A). M&A
transactions allow banks to evolve and thrive in our dynamic banking system and can
promote the long-term health and viability of banks. M&A also ensures that banks have
a meaningful path to transitioning bank ownership. The absence of a viable M&A
framework increases the potential for additional risks, including limited opportunities for
succession planning, especially in smaller or rural communities when zombie banks
continue to exist but have no competitive viability or exit strategy.
The impact of a more restrictive M&A framework affects institutions of all sizes,
including larger institutions that are vying to compete with the very largest global
systemically important banks (G-SIBs). They may choose to pursue M&A to remain
competitive with larger peers who can achieve that growth organically through their
sheer scale.
M&A is an important part of a healthy banking system. So, when considering changes
to the framework, I think we need to first identify the problem that needs to be solved,
and then ask whether any proposed solution is fair, transparent, and consistent with
applicable statutes. And critically, whether the proposed solution has the potential to
damage the long-term viability of the banking system.
Are there identified shortcomings in the current process or standards, and are the
proposed reforms targeted and effective to address these shortcomings? One argument
I have heard about the M&A regulatory approval process is that the lack of application
denials demonstrates that regulators are failing to meaningfully review and pressure
test proposals and have effectively become a rubber stamp. I think this argument lacks
a strong foundation. There is ample evidence that undermines this argument, including
the resource demands on institutions of pursuing M&A activity, and the protracted time
it takes to complete the regulatory review and approval process (and the not
insignificant failure rate we see represented in withdrawn applications).
First, we have to acknowledge that choosing the path of a merger or acquisition is not
undertaken lightly. These transactions require significant upfront and ongoing
investment and commitment of resources. At the outset, this includes finding an
appropriate acquisition target, conducting due diligence, and negotiating the terms of
the transaction. Once a target is identified, the banks must prepare appropriate
regulatory filings, engage with regulators during the application process, and prepare
for post-approval business processes including scheduling necessary and costly
systems conversions and customer transition. This is an expensive and reputationally
risky process that bankers and their boards of directors take extremely seriously.
Second, one would expect to see different patterns emerging if regulators were truly
acting as a "rubber stamp" for banking applications. We know from data published by
the Federal Reserve that filing an application does not guarantee approval, even in the
absence of a regulatory denial. The Federal Reserve's most recent report on banking
applications activity identifies a significant portion of bank M&A transactions in which
applications have been withdrawn.4
The processing timelines we see also seem inconsistent with a process that is
operating truly as a rubber stamp. To be clear, I think we have room to do better when it
comes to timely regulatory action, while maintaining a rigorous review of applications.
But extended review periods are not uncommon, particularly when you include
preliminary discussions and pre-filings with regulators in the published processing
timelines.
Some contemplated regulatory reform efforts will likely make the M&A application
process slower and less efficient. One of the key risks to an effective process is a lack
of timely regulatory action. The consequences of delays can significantly harm both the
acquiring institution and the target, causing greater operational risk (including the risk of
a failed merger), increased expenses, reputational risk, and staff attrition in the face of
prolonged uncertainty.
Reducing the efficiency of bank M&A can be a deterrent to healthy bank
transactionslimiting activity that preserves the presence of community banks in underserved areas,
preventing institutions from pursuing prudent growth strategies, and undermining
competition by preventing firms from growing to a larger scale, effectively creating a
"protected class" of larger institutions.
Unfortunately, the past year has shown that regulatory attention is increasingly focused
on other issues, with the timeliness of regulatory action appearing to be lower on the list
of priorities. However, I would like to highlight a change that may have significant
impacts on M&A transactions depending on how the requirement is implemented.
The Federal Reserve recently proposed changes to its M&A application forms, the FR
Y-3 and FR Y-3F, to include a requirement that an applicant submit an integration plan
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at the time of the initial application. Many applications often include plans for
integration, as this can factor into the consideration of an application's likelihood of
approval. However, depending upon how this requirement is implemented, it could
result in significantly increased upfront costs and burdens for banks in preparing for and
submitting applications for mergers and acquisitions, particularly for smaller institutions.
It is important for industry participants to provide comments on changes to the bank
merger process-including changes to application forms-especially since cost and timing
implications could affect a bank's consideration of these transactions. Ultimately, while
banks are mindful of and do plan for integration, I am concerned that increased upfront
requirements may lead to additional delays in processing timelines. I would therefore
encourage industry stakeholders to review and provide comment on the proposed
changes to our applications forms.
Third-Party Risk Management
Similarly, the agencies also recently released a guide for community banks regarding
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third-party risk management. This guide took the agencies nearly a year to finalize
after adopting third-party risk management guidance in June of last year. I am hopeful
that this community bank guide will be helpful to community banks. But I have yet to be
convinced that the guide will effectively reduce the burden on smaller banks to comply
with our third-party risk management guidance. Since it is not yet clear that this guide
will be effective, I encourage banks to provide feedback on the guide, including on the
clarity and transparency of supervisory expectations for community banks in their
management of third-party risk.
Review of Regulations under the Economic Growth and Regulatory Paperwork
Reduction Act
Finally, I'd like to highlight another opportunity for stakeholders to provide feedback on
the agencies' regulations. In February, the Board announced the initiation of its review
of its regulations to identify those regulations that are outdated, unnecessary, or overly
burdensome in accordance with the Economic Growth and Regulatory Paperwork
Reduction Act (EGRPRA). It is my expectation that this review, and eventually the
accompanying report to Congress, will provide a meaningful process for stakeholders
and the public to engage with the banking agencies in identifying regulations that are no
longer necessary or are overly burdensome.
As a part of the comment process, I would encourage the public, particularly community
banks, to comment on the aggregate burden imposed on banks since the prior
EGRPRA report 10 years ago. While there are many competing priorities on your time,
these are valuable opportunities for you to shape the outcome of our regulations. I
welcome the opportunity to learn from all stakeholders how the Board and the other
banking agencies could reduce burden, especially for regional and community banks.
Prioritization within Bank Regulation and Supervision
I would also like to spend a few minutes on prioritization of regulatory actions. In my
view, it is essential that regulators appropriately calibrate and prioritize supervisory and
regulatory actions. Failing to do so could distract banks, bank management,
supervisors, and regulators from focusing on key risks.
The frenzy of regulatory reform activity we have seen over the past year raises a
question as to whether the banking regulators are pursuing reforms in a prioritized way.
Many reform proposals do not appear targeted to identified shortcomings or
deficiencies in the existing regulatory framework.
While regulators often identify evolving conditions and emerging risks before they
materialize as pronounced stress in the banking system, too often regulators fail to take
appropriately decisive measures to address them. In addition, regulators can also fall
into the trap of getting distracted from core financial risks, and instead focus on issues
that are tangential to statutory mandates and critical areas of responsibility. Focusing
on risks that pose fewer safety and soundness concerns increases the risk that
regulators miss other more foundational and pressing areas that require more
immediate attention. Our recent actions suggest this could be the case, and that we
have taken steps that could distract bank management from focusing on important and
key risks.
The Board's focus on climate guidance is one example, but it is not the only example.
While climate change is an important issue, climate change is not a core risk to the
safety and soundness of financial institutions. The lessons learned from supervisory
failures during the bank stress last spring clearly illustrate that bank examiners and
bank management should focus on core issues, like credit risk, interest rate risk, and
liquidity risk.
I am concerned that focusing our regulatory reform and guidance efforts on issues like
climate change that do not represent core banking risks will only serve to further distract
bank management and supervisors.
In addition to issuing interagency supervisory guidance to banks on managing
climaterelated financial risks, the Board recently issued the results of a pilot climate scenario
analysis, which was designed to learn about large banks' climate risk-management
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practices. This report goes into significant detail on the technical aspects of the
scenario analysis and underlying results.
While exploring even remote risks can help build resiliency for the future, I think the
report itself included some acknowledgment that these exercises may have limited
utility in the short-term for managing risk. For example, the report acknowledges that
participants "suggested that climate-related risks are highly uncertain and challenging
to measure," and that "[t]he uncertainty around the timing and magnitude of
climaterelated risks made it difficult . . . to determine how best to incorporate these risks into
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[banks'] risk-management frameworks on a business-as-usual basis." Participants also
noted that scenario design choices, assumptions, data challenges, and modelling
challenges all played a material role in the analysis.
Banks already have ongoing obligations to manage all material risks, and while
scenario analysis generally is not intended to be predictive, I think the uncertainty and
unreliability of the results from this exercise suggest that resources may be better
devoted to dealing with more tangible and immediate financial risks.
We should rightly be concerned about regulatory pressure on a single issue that could
lead to the misallocation of risk-management resources away from risks that may be
more material, such as interest rate, liquidity, and cyber risks.
Closing Thoughts
We continue to be at an inflection point in the bank regulatory reform agenda. The
pending proposals, including the Basel III capital proposal, the G-SIB surcharge, new
long-term debt requirements, amended resolution plan guidance, contemplated
changes to the regulatory approval of merger and acquisition activity, and revisions to
the interchange fee cap will have a lasting impact on banks of all sizes and their current
and future customers.
My hope is that you and other interested stakeholders play an active role in this process
by sharing your views and concerns with regulators. This input provides valuable
insights into the specific impacts-intended and unintended-of changes to the bank
regulatory framework. Voicing your concerns enables us to identify, and where needed,
address, the real-world consequences of regulatory and supervisory reforms. Without
your participation, we cannot fully appreciate the impacts of our regulatory and
supervisory changes.
Thank you, and I look forward to our discussion.
1
The views expressed here are my own and are not necessarily those of my
colleagues on the Federal Reserve Board or the Federal Open Market Committee.
2
Michelle W. Bowman, "Remarks on the Economy and Prioritization of Bank
Supervision and Regulation (PDF)" (speech at the New York Bankers Association's
Financial Services Forum, Palm Beach, FL, November 9, 2023); Michelle W. Bowman, "
Tailoring, Fidelity to the Rule of Law, and Unintended Consequences (PDF)" (speech at
the Harvard Law School Faculty Club, Cambridge, MA, March 5, 2024).
3
Jonathan Kanter, " Merger Enforcement Sixty Years After Philadelphia National Bank "
(speech at the Brookings Institution's Center on Regulation and Markets Event,
Promoting Competition in Banking, Washington, DC, June 20, 2023); Office of the
Comptroller of the Currency, "Business Combinations Under the Bank Merger Act:
OCC Bulletin
Notice of Proposed Rulemaking ," 2024-4, January 29, 2024; Federal
Deposit Insurance Corporation, "FDIC Seeks Public Comment on Proposed Revisions
to its Statement of Policy on Bank Merger Transactions," news release, March 21, 2024.
4
Board of Governors of the Federal Reserve System, Banking Applications Activity
Semiannual Report (PDF), June 1-June 30, 2023, vol. 10, no. 2 (Washington: Board of
Governors, September 2023). This report notes that in the first half of 2023, 46 M&A
applications were approved by the Federal Reserve, while 12 such applications were
withdrawn.
5
Board of Governors of the Federal Reserve System, Proposed Agency Information
Collection; Comment Request, 89 Fed. Reg. 34,246 (PDF) (April 30, 2024).
6
Board of Governors of the Federal Reserve System, "Third-Party Risk Management:
A Guide for Community Banks (PDF)," SR letter 24-2 / CA letter 24-1 (May 7, 2024).
7
Board of Governors of the Federal Reserve System, Pilot Climate Scenario Analysis
Exercise: Summary of Participants' Risk-Management Practices and Estimates (PDF)
(Washington: Board of Governors, May 2024).
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Pilot Climate Scenario Analysis Exercise, pp. 1-2.