Fed’s Bowman Recommits to Regulating Banks by Size

The Federal Reserve will renew its commitment to tailor regulations for institutions with more than $100 billion in assets, according to Fed Governor Michelle Bowman.

In a speech to South Carolina Bankers Association, Bowman emphasized advantages of a tailored approach as it results in appropriate requirements based on firm characteristics.

She highlighted that a tailored approach benefits banks of all sizes, advocating for a system where the largest banks divided into four categories based on size and complexity, with the largest and most complex firms being subject to the most stringent requirements.

Bowman said: “For example, without tailoring, it is likely that the requirements for the largest and most complex banks would be pushed down to smaller banks that have simple, straightforward business models, either directly through changes to regulation, or indirectly through opaque supervisory expectations.

“This environment would create overwhelming incentives for industry consolidation, since a bank with a simple business model would be subject to and expected to comply with requirements designed for larger and more complex banks, and consolidation creates economies of scale that make it more cost‑effective to comply with these requirements.”

She said the proposed Basel III ‘endgame’ reforms demonstrate the importance of tailored solutions. While the consultation period on the proposals remains open, Bowman said two concerns have emerged from it so far.

The first is that the increase in capital requirements set out in the reforms would exceed stakeholder expectations, and the second is that the proposal “would largely ‘flatten’ the regulatory requirements for all banks over $100 billion, creating a severe cliff effect for firms approaching or crossing that threshold”.