Regulators must stop drafting overbearing rules that stifle banks, a top Fed official has said.
Federal Reserve board governor member Michelle Bowman spoke about the lessons of Silicon Valley Bank’s failure for policymakers.
She warned that supervisors need to be “honest” about the efficacy of rules in an interview at an Institute of International Finance conference in Washington DC on Wednesday.
Bowman made several criticisms of the way regulation has evolved from mergers and acquisition rules to heavy-handed supervision.
“Do we really need a regulation that’s going to direct certain activity that might inhibit a bank’s ability to manage its balance sheet on a daily basis? We need to stop using the failure of Silicon Valley Bank as a basis for introducing rules without fully understanding the effect,” she said.
Bowman added there are “5000 pages or more” of regulation that have been introduced over the past few years that represent “a significant burden” for lenders, especially smaller institutions.
She argued that banks are not utilities — they must take risks and should not be protected from poor commercial decisions.
“In fact we have to recognise [at the Fed and other regulatory institutions] that we are not the bank’s management and sometimes they fail. If we explicitly dictate how a bank should run itself then that is a step beyond supervision.”
On consolidation Bowman pointed out that it is a “very strong topic” among all the regulators.
In February the Office of the Comptroller of the Currency consulted on greater powers to scrutinise bank mergers above $50bn in assets.
The Fed introduced tougher capital requirements under Basel III rules in response to the collapse of regional banks such as Silicon Valley Bank in March 2023.
These say that all lenders with at least $100bn of assets should maintain a longer-term layer of debt to absorb any losses in times of stress.
“Until we are able to provide some transparency, consistency and certainty with that application process, we’re really putting the banking system at a disadvantage here,” Bowman said.
According to Bowman the US is creating a regulatory structure that makes it nearly impossible for banks with assets of more than $50bn to merge with other lenders.
She pointed out there is a risk of losing mid-sized banks that are valuable to the US economy, resulting in a US banking landscape dominated by a few large investment banks and many smaller lenders.
“We must have an ecosystem of banks that serve a range of customers, regions and businesses. These cover small to large companies, whether listed or non-listed,” she said.
Bowman also argued that if banks are not able to merge it could harm their growth prospects and contribute to their failure.
On inflation Bowman said: “A lot of people are struggling with meeting the expectations of increased prices. We’re continuing to see housing being more expensive than it has been in the past, as well as other services and insurance. Affordability is certainly more challenging for people.”
