Higher bank capital requirements could reduce bank lending while benefitting nonbanks, said Federal Reserve Gov. Michelle Bowman in a June 25 speech.
To Bowman, regulators should instead evaluate liquidity requirements and supervisory programs. In the wake of the failures of Silicon Valley Bank, Signature Bank and First Republic Bank, regulators must outline supervisory requirements more clearly and issue timely enforcement actions when those standards are not met, Bowman said. Though she supports focusing on liquidity and interest rate risks and reviewing liquidity requirements, Bowman expressed concern that other changes could be based on incomplete information.
“We need to consider whether examiners have the appropriate tools and support to identify important issues and demand prompt remediation,” she said. “Increasing capital requirements simply does not get at this underlying concern about the effectiveness of supervision.”
Bowman’s comments came after an article in The Wall Street Journal revealed that regulators are looking to increase large bank capital requirements by as much as 20 percent for banks with at least $100 billion in assets, which is less than the existing $200 billion minimum.
To Bowman, any shift to a uniform capital requirements framework would place smaller banks at a competitive disadvantage and could require them to either pull out of key business lines or merge just to meet the necessary economies of scale. She said the requirements could “push additional financial activity out of the regulated banking system. This shift — while possibly leaving a stronger and more resilient banking system — could create a financial system in which banks simply can’t compete in a cost-effective manner.”
Federal Reserve Vice Chair of Supervision Michael Barr indicated that more banks should undergo stringent stress testing in an April 28 report on the Fed’s supervision and regulation of SVB. Bowman criticized Barr’s report, noting the staff review was only conducted on an expedited time frame and was not reviewed by other board members. “A supplemental, independent review would help overcome the limitations of scope and timing of these initial efforts, and address concerns about the impartiality and independence of the reviews,” Bowman added.
Bowman’s comments came as questions continue over whether the financial reforms implemented after the Great Recession are sufficient to protect the stability of the banking system following the bank failures. Bowman refuted the assertion of leading Democrats who attributed the failures to a 2018 bill that lifted the size of banks to face tightened capital liquidity requirements to $250 billion from $50 billion. Democrat Sens. Elizabeth Warren of Massachusetts and Katie Porter of California introduced a bill in March repealing the loosened requirements. The bill remains unpassed.