Michelle W Bowman: Brief remarks on the Economy and Bank
Regulation
Brief remarks by Ms Michelle W Bowman, Member of the Board of Governors of the
Federal Reserve System, at the CEO/Executive Management Conference, sponsored
by the Mississippi Bankers Association and the Tennessee Bankers Association, Banff,
Canada, 2 October 2023.
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Thank you for the invitation to join you today. It is a privilege to speak to so many bank
leaders from Mississippi and Tennessee together at the same time, and I appreciate the
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opportunity to be here with you. As a former community banker, one of the most
informative, enjoyable, and productive aspects of my role is the time I spend with
community bankers, listening to issues that are important to you and that affect you and
your customers, including, of course, the impact of the Fed's regulation and
supervision. Community banks play a key role in supporting economic growth and
lending to serve their customers and communities, which is an indispensable role in the
U.S. economy.
Before we turn to our conversation, I'd like to offer a few thoughts on the economy and
monetary policy, following our Federal Open Market Committee (FOMC) meeting last
month. As you know, at that meeting, my colleagues and I voted to maintain the target
range for the federal funds rate at 5-1/4 to 5-1/2 percent, after raising rates sharply over
the past year and a half to reduce inflation. Since then, there has been considerable
progress on lowering inflation and the FOMC has responded this year with a more
gradual pace of increases. In keeping with this approach, we held the policy rate steady
in June, raised it by 25 basis points in July, and then held steady again last month.
Inflation continues to be too high, and I expect it will likely be appropriate for the
Committee to raise rates further and hold them at a restrictive level for some time to
return inflation to our 2 percent goal in a timely way.
Most recently, the latest inflation reading based on the personal consumption
expenditure (PCE) index showed that overall inflation rose, responding in part to higher
oil prices. I see a continued risk that high energy prices could reverse some of the
progress we have seen on inflation in recent months.
At the same time, the economy has remained strong as the FOMC has tightened
monetary policy. Real gross domestic product (GDP has been growing at a solid pace.
Consumer spending has remained robust, and the housing sector appears to be
continuing to rebound. The most recent employment report showed a labor market with
solid job gains. The average pace of job gains over the past year has slowed somewhat
and the labor force participation rate has also improved over the same time frame, a
sign that labor market supply and demand may be coming into better balance.
The banking system continues to be strong and resilient. Banks have tightened lending
standards due to higher interest rates and funding costs and in anticipation of future
regulatory requirements. But despite this tightening of lending standards, there has not
been a sharp contraction in credit that would significantly slow economic activity. Bank
loan balance growth has slowed, but ongoing strong household and business balance
sheets combined with the growing importance of non-bank lending suggest that
monetary policy may have smaller effects on bank lending and the economy than in the
past.
Given the mixed data releases-strong spending data but a decline in inflation and
downward revisions to jobs created in previous months-I supported the FOMC's
decision to maintain the target range for the federal funds rate. Since then, the GDP
data have also been revised. The frequency and scope of recent data revision
complicates the task of projecting how the economy will evolve. But I continue to expect
that further rate increases will likely be needed to return inflation to 2 percent in a timely
way. The Summary of Economic Projections released in connection with the September
FOMC meeting showed that the median participant expects inflation to stay above 2
percent at least until the end of 2025. This, along with my own expectation that
progress on inflation is likely to be slow given the current level of monetary policy
restraint, suggests that further policy tightening will be needed to bring inflation down in
a sustainable and timely manner.
It is important to note that monetary policy is not on a pre-set course. My colleagues
and I will make our decisions based on the incoming data and its implications for the
economic outlook. I remain willing to support raising the federal funds rate at a future
meeting if the incoming data indicates that progress on inflation has stalled or is too
slow to bring inflation to 2 percent in a timely way. Returning inflation to the FOMC's 2
percent goal is necessary to achieve a sustainably strong labor market and an economy
that works for everyone.
I would also like to briefly discuss recent and future developments in banking regulation.
The bank failures and accompanying banking system stress earlier this year made clear
that the Federal Reserve, and in some cases the other federal banking agencies, need
to address supervisory shortcomings and potentially consider revision of some
failurerelated bank regulations. I have previously noted my perspective on the path forward,
that proposals should be (1) focused on remediating identified issues and
shortcomings; (2) informed by data, analysis, and genuine debate and discussion
among policymakers within each of the participating agencies; and (3) developed
through a transparent and open process that allows policymakers and the public to
understand the context, data, and analysis underlying the proposed reforms. The
process must also incorporate the opportunity to solicit meaningful public comment.
Today we have an opportunity to revisit the path of regulatory reform, starting with
whether we have identified the relevant issues and shortcomings. There have been a
number of reports discussing the root causes of the failure of Silicon Valley Bank (SVB),
including just this past week, a report from the Board's Office of the Inspector General.
Collectively, these reports have provided some valuable insights into the bank failure,
but in my view, much work remains to ensure we have identified all of the factors that
contributed to the failure of SVB, and the subsequent failures of Signature Bank and
First Republic, including the actions of regulators in the lead-up to and following the
failures. While there is overlap between many of the findings in the reports published
todate, these reports have not reached entirely consistent conclusions.
One way to effectively identify and address these issues is to engage an independent
third party to conduct a review. As I have said since shortly after the bank failures
occurred, a third-party review should review and analyze a broader time period than the
limited time periods covered to-date, including a broader range of topics and issues that
are likely to identify further areas in need of reform. While this type of review would be
an unusual step, it is appropriate where, as here, the existing limited reviews are driving
the regulatory reform agenda, and where these bank failures have caused significant
losses.
Put another way, the purpose of an independent third-party review would be to analyze
the events surrounding the failure of these banks, so that we can fully understand what
led to the failures. This would be a logical next step in holding ourselves accountable.
Before making conclusions about appropriate responses going forward to address
causal issues, we need accurate, impartial, and thorough information to inform the
debate about what specifically may be needed to fix any problems in our supervision
and regulatory framework. While the Board has made some confidential supervisory
information about SVB available to the public, an outside party has an inherent
disadvantage in probing the events surrounding the failure of a bank-they do not have
access to the full supervisory record, and they have no ability to conduct extensive staff
interviews. The Board could easily put this criticism to rest simply by engaging an
independent third party to prepare a more thorough and broadly scoped report and
giving that party the necessary access to information.
Of course, the staff who prepared the internal reviews, both the review led by Vice
Chair for Supervision Barr, and the recently prepared report of the Board's Office of the
Inspector General, had greater capacity to review internal information and speak with
staff. But both of these reports themselves acknowledge their limited scope, related to
the time constraints and the nature of the specific questions probed.2
While the reports produced to-date have provided some insights, it is worth pausing and
reflecting on whether we have our regulatory and supervisory priorities aligned with the
most pressing needs demonstrated by recent events, and whether we are taking the
right "lessons learned" from these events. As regulators continue to pursue further
supervisory and regulatory reforms, we should also pause and reflect on whether these
changes are appropriately calibrated and executed.
To be clear, supervisory priorities have already been influenced by the bank failures
earlier this year. The trend seems to be that regulators are engaging in supervision with
a more heavy-handed approach, focusing primarily on quarterly call report data in some
cases without the benefit of direct engagement with the targeted financial institutions.
The Board has long found that information received outside of a regular examination
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may suggest the need to carefully consider whether bank ratings remain appropriate.
But when engaging in this type of off-cycle review, we should consider whether the
process is appropriately calibrated, is transparent to the financial institution, and
whether it provides the financial institution the ability to engage in meaningful dialogue
and discussion with examiners. In my mind, bank data analysis that occurs exclusively
in an off-site context prevents supervisors from leveraging important opportunities to
engage with financial institutions to effectively deliver supervisory messages. It is
entirely appropriate to express concern or engage in dialogue with management, or to
gain a better understanding of a bank's strategic direction or risk management
approach based on reported data. Financial results are key, but in the continuum of
supervision, we should not forget the value of a broader based supervisory approach
that uses all available tools and considers all relevant factors.
We should also carefully consider whether our approach is appropriate in the moment:
Are the federal banking agencies acting in a consistent manner in their bank
supervisory activities? Are federal banking agencies coordinating appropriately with
state banking agencies when reviewing state-chartered banks? And fundamentally, are
supervisory decisions being driven by a comparison or horizontal review of differences
among institutions that may have very different business activities and risk profiles? Are
supervisors acting pro-cyclically, or overreacting to the events of March 2023? When
agencies adopt a more adversarial approach to supervision, or apply standards that are
disproportionate to risk, does that negatively impact a bank's ability and willingness to
engage in open communication with their examiners?
Asking these questions can help us appropriately calibrate our revised approach to
banking supervision and help us avoid reacting in a way that is disproportionate to an
institution's risk to the banking system.
Before concluding my prepared remarks, I'd like to discuss the Federal Reserve's and
the other Federal banking agencies' rulemaking agenda. A number of rules have been
proposed for comment or are currently in the pipeline. Some have already been
published for comment including the proposal to implement Basel III "endgame" by
significantly expanding capital requirements and bringing the threshold for compliance
down to include all banks over $100 billion in assets from only the largest GSIB banks,
and the expansion of the long-term debt requirement from only the largest banks again
to all banks over $100 billion in assets. Still other proposals have not yet been
published or moved to the next stage of the rulemaking process, including the
Community Reinvestment Act rulemaking, the further consideration of climate guidance,
and others. The Board has also publicly indicated it may propose additional revisions in
the future to Regulation II.
The scope of some of these reforms will be extensive and could reshape the contours
of the bank regulatory framework in important ways, including for community banks. It is
critical that stakeholders engage in the comment process and communicate with
policymakers to share their views on the rulemaking agenda, including the specific
impacts-intended and unintended-of any changes. Public comments, data, and analysis
help to inform decisions made throughout the rulemaking and proposal process. The
bankers in this room and across the country are vitally important to the banking system,
and to the broader economy, and it is important that as reforms take shape, we
incorporate your perspectives on the real-world consequences of any considered
reform.
I look forward to our conversation.
1
The views expressed here are my own and not necessarily those of my colleagues on
the Federal Open Market Committee or the Board of Governors.
As noted in Vice Chair for Supervision Michael Barr's review of the supervision and
regulation of Silicon Valley Bank, "[the] report was written with the benefit of hindsight
on the particular facts and circumstances that proved most relevant for SVB and
SVBFG. The report was prepared in a compressed time frame from March 13, 2023,
through April 28, 2023, and further work over a longer period could draw additional or
different conclusions." Barr, Review of the Federal Reserve's Supervision and
Regulation of Silicon Valley Bank. As noted in the Material Loss Review of SVB, the
objective of the report was to determine why SVB's failure resulted in a material loss to
the Deposit Insurance Fund, and to assess the Federal Reserve's supervision of SVB
from January 2018 through March 2023. Board of Governors of the Federal Reserve
System, Evaluation Report 2023-SR-B-013 (September 25, 2023).
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Federal Reserve SR Letter 99-17 (June 24, 1999).