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Financial Services Law Insights and Observations

Fed's Bowman discusses research of regulatory thresholds, deposits

Bank Regulatory Federal Issues Federal Reserve Deposit Insurance Agency Rule-Making & Guidance

On October 4, Federal Reserve Governor Michelle Bowman delivered a speech at the Fed’s annual Community Banking Research Conference, calling for more research on regulatory thresholds and the deposit insurance framework. In her remarks, Bowman discussed the importance of evidence-based research around community banks and their role in the U.S. banking system, especially in light of recent bank failures. “Research and evidence-based rulemaking can insulate the banking system from wide swings in policy over time,” she said, adding that before rulemaking, the agency must have a comprehensive understanding of both the root causes of bank failures and the costs and consequences of potential reforms.

Bowman additionally discussed needed reforms to bank merger policy, particularly  to include nonbank competitors and credit unions in the analysis of the competitive landscape. Bowman argued that the use of a narrower view on competitive concerns has led to increasingly long application and review periods for mergers, which can increase negative outcomes.  

Regarding community bank thresholds, Bowman noted contradictions and inconsistencies how community banks are defined, and accordingly regulated, across the regulatory system. For example, while the Dodd-Frank Act defined community banks as those institutions with less than $10 billion in total consolidated assets, the Community Reinvestment Act regulation includes asset thresholds well below the “common understanding of what a community bank is.”  “Are these asset size thresholds properly calibrated, and are the impacts, costs, and benefits to institutions and to customers when banks cross these different thresholds rational? Are these thresholds creating the right incentives to promote prudent lending while appropriately balancing risk?” Bowman asked. She suggests leveraging business models in tailoring rules, instead of looking only at asset-size thresholds.

Another area in need of research in the wake of recent bank failures, Bowman suggested, is bank funding models and deposit infrastructure. Thanks to modern technology, consumers can withdraw funds faster than ever, so deposit insurance parameters are worth revisiting to ensure it can “support banking sector stability in the face of the challenges posed by today's technology,” Bowman said.