For release on delivery
9:00 a.m. EDT (8:00 a.m. CDT)
May 19, 2023
Considerations for Revisions to the Bank Regulatory Framework
Remarks by
Michelle W. Bowman
Member
Board of Governors of the Federal Reserve System
at
Texas Bankers Association
Annual Convention
San Antonio, Texas
May 19, 2023
It is a pleasure to be here with you today.1 I am especially pleased to participate in this
"Building Stronger
event focused on Communities." As a former banker, former state bank
commissioner, and a member of the Federal Reserve Board that theme really resonates with me.
We all know that a safe, sound, and fair financial industry built upon the dual banking system is
the foundation of strong and stable communities. All throughout this great nation, and the state
of Texas, community and regional banks provide financial services and essential credit to assist
families and businesses achieve their dreams.
Federal regulators, including the Federal Reserve, in partnership with state banking
departments-like Commissioner Cooper and his team here in Texas-are responsible for
ensuring that banks provide these services in accordance with consumer and safety and
soundness laws. State bank regulators help to provide context and an understanding of the
unique economic conditions that exist within Texas and within the different regions of the state.
that a bank's
This context helps our supervisory teams at the Fed better understand the decisions
management might make in light of particular circumstances and market dynamics.
Today, I thought I would spend some time following up on a few topics that I have been
speaking about recently that provide some insight into the roles of policymakers and regulators,
but most importantly highlighting the critical role of bankers in facilitating a strong economy. I
will begin with bank supervision and risk-tailored bank regulation, and how I think about
tailoring in the context of the recent bank failures and ongoing discussions about regulatory
reform. I will then talk about the benefits of nimble supervision and how that approach supports
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a U.S. financial system with banks of all sizes in every community in every diverse region of this
country.
And finally, I will address the importance of ensuring that both banks and examiners are
well prepared and positioned for potential stress in the banking market. Most importantly,
of due process in the Federal Reserve's bank supervision.
though, I want to emphasize the role
We should not be remotely analyzing your bank and downgrading your rating without
communication and justification. Due process requires formal engagement between examiners
and the bank. If our examiners believe there is a reason to be concerned with the condition of
your institution, the examiners should notify you and engage directly with you to make sure that
they have a clear understanding of all of the facts, and that any supervisory actions-including
any discussion of ratings downgrades-are appropriate based on the unique facts and
circumstances of the institution.
while since I've felt
It's been a the need to say this to our state-chartered banks, but the
time has come to renew this message today and to emphasize it going forward. I'm sure you are
not surprised that our largest bank CEOs do not hesitate to engage directly with the Board and
Reserve Bank presidents. I see one of my many functions and roles as a Member of the Board of
Governors as providing that open door and opportunity for direct engagement with a
policymaker for our regional and smaller banks, as well. Your Texas ABA executive, Chris
Furlow, who is a long time friend and colleague, can put you directly in touch with me should
you desire to do so. As a former banker, and bank commissioner, I know from experience that
And it's always better to
building a relationship is key to effective communication. have made
that connection before you need it. I look forward to that opportunity to get to know each of
you.
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Tailored Supervision and Regulation, and the Path Forward for Reform
As every banker in this room knows, tailoring is a critical aspect of the federal regulatory
and supervisory framework. It has continued to be a core principle in strengthening bank
oversight since the 2008 financial crisis. Over the years, as regulators refined and improved the
regulatory and supervisory framework, the concept of tailoring has evolved. Overseeing banks
based on their size, risk, business model, and complexity provides appropriate proportionality to
our work.
I've often said that risk-based supervision is itself a form of tailoring.2 This approach to
supervision and regulation, when it works effectively, allows us to focus supervisory attention on
areas that pose the greatest risk. It also recommends differences in regulatory requirements and
supervisory expectations, based on the size and complexity of the bank. It is simply common
sense that what works well for the largest global systemically important banks (G-SIBs) is not
appropriate for regional and community banks. Our tailored approach applies across many areas,
including in the stringency and complexity of capital requirements and for regulatory reporting
obligations.
As regulators consider the appropriate response to the recent bank failures, a renewed
focus on the role of tailoring has emerged. From my perspective, there are several important
steps we must take. First, we must seriously consider the feedback from a variety of internal and
external viewpoints to identify what went wrong. In my view, one of the most effective steps the
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Federal Reserve could take would be to engage an independent third party to analyze the events
surrounding the failure of these banks, so that we can fully understand what led to the failures.
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.
Second, supervisors must do a better job of focusing on and identifying key issues and
risks to ensure they can be promptly remediated. It is imperative that bank management, the
board of directors, and supervisors understand bank business models, and risks that may emerge
to threaten that model. Where issues are identified, supervisors need to clearly explain the
concerns, so that bank management can create a plan to address them. Regulators already have a
comprehensive toolkit at their disposal to encourage issue resolution, and frankly, we need to use
those tools appropriately, not create more tools because we failed to use the tools at our disposal.
To be sure, we do need to consider whether there are necessary, appropriate adjustments
to improve the bank regulatory and supervisory framework. But our focus in doing so must be
concentrated on identified problems and risks with clearly defined goals and outcomes. We
should avoid using these bank failures as a pretext to push for other, unrelated changes to bank
regulation. But, as we engage in this exercise, I think we need to carefully consider both the
strength of the current regulatory framework and the effective implementation of tailored
supervision.
On this last issue-as we consider making changes-we need to carefully consider how
these proposals will incorporate tailoring of regulation and supervision-specifically when
considering reforms.
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Are we in the same place today as we were at the onset of the 2008 financial crisis? Of
course not. While we have seen stress in some parts of the banking system, overall the system is
strong and resilient. U.S. banks have high levels of capital and liquidity, and banks of all sizes
continue to support the economy. To a large degree, this strength comes from the work done at
the direction of Congress, most recently pursuant to the bipartisan Economic Growth, Regulatory
Relief, and Consumer Protection Act, which better aligned regulation with risk.3 The strong set
of laws and regulations we have today suggests that the problems in the banking system require a
targeted solution, one focused on actual risks, on improvement of supervision and risk
management, and on prompt remediation of supervisory issues.
Not only is the current tailoring approach robust, it also results in efficiency. Tailoring
distinguishes firms by size, risk, and complexity, and imposes appropriate regulatory
requirements in light of these differences. The Board considers a number of factors when
evaluating the largest firms, including size, cross-jurisdictional activity, reliance on short-term
wholesale funding, off-balance sheet exposures, and nonbank assets. These characteristics, and
the G-SIB scoring methodology more broadly, help distinguish the largest firms that pose the
greatest risks from smaller and less systemic firms. Even for smaller firms, we have clear
regulatory standards and thresholds to ensure that supervision is appropriately tailored for each
institution. This framework provides appropriate scale for both regulators and for banks. It
strikes the crucial balance between safety and soundness and ensuring that well-supervised and
regulated banks are able to continue providing credit to their local and regional businesses and
communities.
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Fundamentally, we should be careful not to undermine tailoring and risk-based
supervision. While there were some clear lapses in the supervision of Silicon Valley Bank, our
Fed supervisors and those with the other banking agencies are dedicated public servants who I
am confident will embrace the lessons learned from the recent bank failures. We need to provide
examiners with direction and support to promote safety and soundness in the banking system.
The banks that recently failed were unique in their operations and business models. These
failures alone do not justify layering on inefficient and overly complex supervision on a broad
range of other banks.
Nimble Supervision
One reasonable expectation from the many reviews of the recent bank failures will likely
be an analysis of and recommendation for changes in supervision. How do we prioritize these
issues for improving risk-based supervision? How do we revise those priorities when underlying
economic conditions evolve or banks begin to engage in new activities that present new risks?
We will need to be sure that whatever approach we adopt, we devote sufficient supervisory
attention to the areas of highest risk, while not hindering innovation.
I've briefly discussed
As today, we need to have a supervisory system that focuses
appropriate attention on the traditional risks that are inherent to the business of banking: credit,
liquidity, concentration, and interest rate risk. Historically, supervision has been an effective
tool to address these traditional risks. Supervisors can make sure that banks are working to
mitigate such risks with effective risk management and liquidity planning.
As we consider changes to our framework, we need to understand potential unintended
consequences and be mindful that we do not inhibit innovation so that banks remain competitive
and well positioned to effectively serve the needs of their customers.
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It will continue to be a challenge to ensure the appropriate focus on traditional banking
risks while encouraging innovation. But it can be accomplished if we approach it from the need
for transparency, transparency by banks about their innovation activities and agenda, and
transparency by regulators regarding supervisory expectations and emerging risks. Transparency
can help us promote these dual objectives, maintaining a focus on traditional risks, while
enabling banks to innovate in a safe and sound manner, with a clear understanding of our
expectations. At the same time, failure to adopt a transparent approach can lead to adverse
consequences for consumers, businesses, and communities by limiting banking products and
services and pushing activities outside of the regulated banking system. We need to preserve
regulatory support for innovation conducted safely and soundly consistent with applicable laws,
including consumer protection.
Promoting Bank Readiness
Voices calling for broad, fundamental reforms of the U.S. banking system appear to
advocate a shift away from tailoring and risk-based supervision. The view that we extend the
reach of overly complex and outsized regulatory requirements to banks that are smaller and less
complex ignores some likely results-doing so will lead to bank consolidation, and will
potentially push banking activities outside of the regulated banking system. This could also lead
to the elimination of all but the largest too-big-to-fail banks who would then be insulated from
other competition. This is surely not the outcome that supporters of the 2008 financials crisis
reforms were seeking.
It is also, in my mind, not the right approach. In a time of potential stress, we need to be
forward focused on bank preparedness so that banks are positioned to address issues of concern.
These include being prepared to address contingency funding needs, with a plan in place that has
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been tested and is ready to be executed. Regulators need to be supportive of this kind of
planning. One of the preliminary lessons learned from the recent bank failures is that bank
management, and their boards of directors, should be prepared to test the banks' ability to
manage liquidity needs during times of stress.
This is one area where I think bankers can make an important, immediate contribution. I
strongly encourage bankers to consider creating a plan to handle liquidity needs during times of
unexpected stress-and then test the ability to execute the plans. Adverse conditions can
a bank management's
escalate quickly, and influences beyond control, including irrational
actors, can impact your business in very short order. For example, we know that a number of
banks have not registered for or accessed the Federal Reserve's discount window.
But if the bank plans include accessing discount window lending-even if the likelihood
of that stress is extremely remote-it is critical to understand in advance the steps needed to be
taken during the emergency. This could include testing the capacity to pledge collateral or even
just contacting your local Reserve Bank to learn about or complete the necessary onboarding
procedures.
The Path Forward
My views on the path forward are informed by serving as the bank commissioner for the
state of Kansas as its lead regulator and supervisor, my experience as a banker, and especially by
my service on the Board of Governors since 2018, during a time when the banking system has
experienced many unique stresses including those associated with the COVID pandemic. There
have already been some preliminary and expedited internal reports published on the failures of
SVB and Signature Bank, and I fully expect to see additional reports and analysis of these
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failures, and the failure of First Republic, in the coming months.4 These preliminary reviews are
an important first step for the U.S. bank regulators working to identify root causes of these bank
failures and holding themselves accountable for supervisory mistakes. There are additional steps
that we can take.
First, I believe that the Federal Reserve should engage an independent third party to
prepare a report to supplement the limited internal review to fully understand the failure of SVB.
This would be a logical next step in holding ourselves accountable and would help to eliminate
the doubts that may naturally accompany any self-assessment prepared and reviewed by a single
member of the Board of Governors.5 This external independent report should also cover a
broader time period, including the events of the weekend following the failure of SVB, and a
broader range of topics beyond just the regulatory and supervisory framework that applied to
SVB, including operational issues, if any, with discount window lending, Fedwire services, and
with the transfer of collateral from the Federal Home Loan Banks.
Second, I believe we need to do a better job identifying the most critical issues and
moving quickly to remediate them. It is evident that both supervisors and bank management
neglected key, long-standing risk factors that should be an area of focus in any examination.
These include concentration risk, liquidity risk, and interest rate risk. We have the tools to
4
See Government Accountability Office, "Bank Regulation: Preliminary Review of Agency Actions Related to
March 2023 Bank Failures" GAO-23-106736 (Washington: Government Accountability Office, April 2023),
"FDIC's Supervision of
https://www.gao.gov/assets/gao-23-106736.pdf; Federal Deposit Insurance Corporation,
Signature Bank" (Washington: Federal Deposit Insurance Corporation, April 28, 2023),
https://www.fdic.gov/news/press-releases/2023/pr23033a.pdf; Michael Barr, Vice Chair for Supervision of the
Board of Governors of the Federal Reserve System, "Review of the Federal Reserve's Supervision and Regulation
Bank" (April 28, 2023),
of Silicon Valley
https://www.federalreserve.gov/publications/files/svb-review20230428.pdf.
5
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.
address these issues, but we need to ensure that examiners focus on these core risks and are not
distracted by novel activity or concepts.
Finally, we should consider whether there are necessary-and targeted-adjustments we
should make to banking regulation. This will likely include a broad range of topics, including
taking a close look at deposit insurance reform, the treatment of uninsured deposits, and a
reconsideration of current deposit insurance limits.6 We should avoid using these bank failures
as a pretext to push for other, unrelated changes to banking regulation. Our focus should be on
remediating known, identified issues with bank supervision and issues that emerge from the
public autopsy of these events.
A debate about regulatory changes must also consider where we are today as compared to
prior to the 2008 financial crisis. The banking system is strong and resilient despite recent
banking stress. The Fed has refined regulatory standards over time at the direction of Congress,
"tailoring" regulations
and through the I discussed earlier that are designed to better align
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regulation with risk. Even with the implementation of these changes, banks today are better
capitalized, with more liquidity, and are subject to a new range of supervisory tools that did not
exist prior to 2008. This banking system is not only strong today but is well prepared to continue
supporting the provision of credit and the broader economy.
Radical reform of the bank regulatory framework-as opposed to targeted changes to
address identified root causes of banking system stress-is incompatible with the fundamental
strength of the banking system. I am extremely concerned about calls for casting aside tiering
expectations for less complex institutions, given the clear statutory direction to provide for
appropriately calibrated requirements for these banks.
I have also heard calls for broad, fundamental reforms for the past several years, shifting
away from tailoring and risk-based supervision. I believe this is the wrong direction for any
conversation about banking reform. The unique nature and business models of the banks that
recently failed, in my view, do not justify imposing new, overly complex regulatory and
supervisory expectations on a broad range of banks. If we allow this to occur, we will end up
with a system of significantly fewer banks serving significantly fewer customers. Those who
will likely bear the burden of this new banking system are those at the lower end of the economic
spectrum, both individuals and businesses.
The American economy relies on a broad and diverse range of businesses supported by a
broad and diverse range of banks. Eliminating regional banks from the U.S. banking system
would be devastating to businesses and communities across America. Especially in those
regions whose communities are not sufficiently served by larger institutions.
As I conclude, I want to reiterate that the banking system remains strong and resilient,
and that bankers across Texas, and the United States, are deeply engaged in their work to support
and build their local businesses and communities. It is imperative that going forward
policymakers preserve a framework that supports a diverse and dynamic banking sector, with
banks of all sizes that serve the needs of their unique customers wherever they are located.
Thank you for the opportunity to speak with you today.