Nonbanks and credit unions engaging in the same activities as community banks should face the same regulations, guidance and supervisory requirements, said Federal Reserve Gov. Michelle Bowman.
Speaking Oct. 11 during a banking symposium in Chicago, Bowman said banks face higher taxes and stricter regulations than other financial institutions which sometimes have similar business models. “Where the financial regulatory framework can provide for parity of treatment, it should do so,” she said. “The regulatory framework should not knowingly distort competition, or effectively impose a regulatory allocation of credit.”
In 2023, the Federal Reserve, Office of the Comptroller of the Currency and FDIC called on banks to customize their risk management practices proportionally to their size, complexity, risk profile and third-party relationships. Bowman said the guide regulators issued this year to help community bankers navigate that guidance showed a shortcoming in the regulatory approach. “We must ensure new guidance provides clarity to regulated firms on its own, or that we provide additional resources at the time the guidance is published,” she added.
Bowman called for considering other changes to regulatory policy:
- Revising size thresholds as inflation and economic growth slowly chip away at regulatory categories. “Over time, these fixed thresholds effectively result in more firms being ‘scooped in’ to higher compliance tiers over time, even when there has been no change in a bank’s underlying risk profile,” she added.
- Easing the processes of approving mergers and acquisitions and de novo banks to avoid forming a “barbell” of the largest and smallest banks in the financial system. “Left unchecked, an application process that imposes additional costs and delays on healthy and appropriate banking transactions will result in a reduction in available credit and services, an increase in the number of unbanked or underbanked communities, and economic harm,” Bowman said.
- Allowing for more input from policymakers with banking or state supervisory experience, and soliciting feedback from state banking regulators. Bowman also called for a greater emphasis on understanding the drawbacks of regulations and tailoring new rules based on the size and complexity of banking activities.