Bowman skeptical about higher capital requirements

Bank Regulatory Federal Issues Federal Reserve Supervision

On June 25, Federal Reserve Governor Michelle W. Bowman expressed skepticism about calls for higher capital requirements following a string of recent bank failures, warning that stricter capital standards could hinder bank lending and diminish competition. In prepared remarks delivered during a global financial seminar held in Salzburg, Austria, Bowman said that while efforts have been taken to understand what went wrong, which have revealed “some uncomfortable realities about the lead-up to the bank failures,” the majority of the work was prepared internally by Fed supervision staff “relying on a limited number of unattributed source interviews, and completed on an expedited timeframe with a limited scope.” She commented that a necessary next step would be to engage an independent third party to analyze what factors and circumstances contributed to the recent bank failures. Independent reviews, Bowman said, “should play an important role in informing the future path of supervision and regulation.”

Bowman further stressed that banks are currently better capitalized and more closely supervised than before the 2008 financial crisis. The banking system is strong and resilient, Bowman said, which “begs the question—what are the justifications for higher capital requirements?” Instead, regulators should consider whether examiners are armed with the appropriate tools and support to identify material risks and demand prompt remediation. “Increasing capital requirements simply does not get at this underlying concern about the effectiveness of supervision,” she said. She commented that if regulators think about what tools are most effective and efficient in addressing shortcomings, they will find ways to improve supervision, revise liquidity requirements, or improve banks’ preparedness to access liquidity. Bowman cautioned that while “higher capital implies greater resiliency,” this resiliency comes at the cost of decreased credit availability and higher cost of credit in normal times, which “can have broad impacts on banks, the broader financial system, and the economy.” Rising bank capital requirements, Bowman added, may also “exacerbate the competitive dynamics that result in advantages to non-bank competitors and push additional financial activity out of the regulated banking system.”