A plan to increase capital requirements for banks with more than $100 billion in assets could threaten the stability of the financial system, said Federal Reserve Gov. Michelle Bowman.
In July, the FDIC, Federal Reserve and Office of the Comptroller of the Currency unveiled the plan, which would require bank holding companies with more than $100 billion in assets to set aside 16 percent more capital to protect against unrealized losses.
Speaking Oct. 11 during an economic festival in Morocco, Bowman said the hike could push more banking services to nonbanks, potentially causing a drop in the availability of credit and other financial services.
“Regulatory capital requirements, no matter how conservatively calibrated they may be, are simply no substitute for sound risk management and strong, effective, efficient and transparent supervision,” Bowman added. “The vast majority of improvements to supervisory functions could be accomplished without broad changes to the regulatory framework.”
Bowman has said that 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. In July, Bowman voted against starting the rulemaking process.
The final rule is expected to be effective July 1, 2025, with it taking full effect during the second half of 2028. The majority of banks have enough capital to meet the requirements, said FDIC Chair Martin Gruenberg. Still, the majority of bank executives remain worried that the increase will trickle down to smaller banks, according to an IntraFi survey of bank executives in July.
Bowman, who was appointed to the Federal Reserve Board in 2018, also described other banking system challenges. She sees higher funding costs and deposit outflows as creating vulnerabilities for banks relying on expensive deposits and long-term asset holdings.
Bowman also sees the Federal Open Market Committee’s monetary tightening as posing stability risks. The FOMC has raised its target range by 5.25 percentage points in less than two years while reducing its securities holdings. “A rising interest rate environment may also erode the credit quality of bank loan portfolios should economic activity and incomes soften, posing an additional source of risk to bank earnings and capital,” she noted.