the new landscape for banking competition remarks by michelle w. bowman member board of governors of the federal reserve system at 2022 community banking research conference federal reserve bank of st. louis september 28, 2022 good morning and thank you, it ’ s great to be back here in st. louis for this year ’ s research conference. 1 while the federal reserve learned a lot about how to operate virtually during these past two - and - a - half years of the pandemic, there are certain interactions and discussions that are just better face to face. for me, this conference is one of them. it ’ s also significant that we ’ re able to be here in person to commemorate the 10th year of these proceedings. i ’ d like to share a few thoughts on how we got here. back in 2013, in the wake of the financial crisis and the passage of the doddfrank act, the federal reserve, the federal deposit insurance corporation ( fdic ) and the conference of state bank supervisors ( csbs ) created this conference, based on the understanding that research plays a vital role in shaping our nation ’ s supervisory and regulatory policy. simply put, good research leads to good policy, and the decision was made to create a conference that could attract high - caliber research on community banking from all over the world. the conference was also designed to be a forum for multiple stakeholders — researchers, policymakers, and community bankers — to come together annually to share insights and perspectives, all in the interest of better informing current and future research. in my view, this gathering has certainly delivered on, and expanded upon, these promises. sadly, two of the pioneers of this conference are no longer with us to celebrate this important 10 - year milestone : john ryan, president and ceo of the conference of state bank supervisors, and rich brown, chief economist at the fdic, both have passed i would like to acknowledge the assistance of jim fuchs of the federal reserve bank of st. louis in preparing these remarks. - 2away since the last time we were able to be here together in person. john created the vision for this conference and oversaw its success to this point, while rich served for many years on the conference research committee, and even served as an academic discussant. both have shaped this conference in important ways, and both will be deeply missed. in 2014, csbs, under john ryan ’ s leadership, identified a need for more forward - looking data and information on community banks and the

. as a result, changes to current accounting practice will also have a direct impact on the quality of accounting capital and on how supervisors assess that capital for regulatory purposes. 7. points of divergence from banking supervision accounting standards operate under a different time horizon than capital standards and have their greatest impact in the area of loan losses. under ifrs and us gaap, allowances for incurred losses must be based on the occurrence of a given loss event rather than historical trend information alone. for some banks at least, this means that allowances at any point in time are unlikely to be sufficient to meet full el requirements although, amazingly, we did see some excesses during our qis work. also, dynamic provisioning approaches that provide “ through the cycle ” accounting are unlikely to be acceptable. this means banks must take the credit risk premium charged to cover expected losses to income, even if the related losses cannot be recognised until a much later date. 8. points of divergence from banking supervision standard setters also don ’ t appear to give much consideration to the financial stability implications of their proposals. first, they seem indifferent to how much additional volatility could be created in banks ’ financial statements as a result of the wider use of fair values. second, they do not share the concerns of supervisors and many others that fair valuing changes in own credit risk is inappropriate, especially when this means recognising gains based on deterioration of one ’ s own credit. even if supervisors can make appropriate adjustments to these items for regulatory capital purposes, how users will react to what is published in the financial statements is a worry for both banks and banking supervisors. finally, supervisors are deeply concerned with the apparent disconnect between how banks manage portfolios of risk and the models produced by standard setters to capture these activities. the key issue is that international standards apply fair value to whole instruments rather than the underlying risks, and to single contracts rather than portfolios, and we believe that standard setters need help to better understand the business of banking. as chairman caruana noted, good accounting should support sound risk management practices. certainly the two pictures should not be in conflict. 9. additional challenges for banking supervision if these issues were not enough, supervisors must grapple with more subjective balance sheet measurements and what this means for the reliability of financial statement values. in this case, subjectivity takes two forms : the need to use models for instruments that do not have active local markets, and the potential for