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Fed's Bowman supports easing regulations to allow banks to compete with non-bank financial institutions
The banking system is sound, but tailoring and easing some regulations will allow banks to compete with non-bank financial institutions, Federal Reserve Vice Chair for Supervision Michelle Bowman said on Thursday in a Senate hearing.
"The banking system remains sound and resilient," she said in the update from prudential regulators to the U.S. Senate Committee on Banking, Housing, and Urban Affairs. "Banks continue to report strong capital ratios and significant liquidity buffers, which position them well to support economic growth," she said in text for her opening statement.
However, she stressed the need for banks to innovate to compete with non-bank financial institutions, which aren't subject to the strict regulations that banks are. "We have rescinded several policies that were intended to hinder innovation," Bowman said. "We are also working with the other banking regulators to develop regulations that include capital and liquidity for stablecoin issuers as required by the GENIUS Act."
She vowed to provide clarity on the treatment of digital assets to make sure that the banking system "is well placed to support digital asset activities."
Bowman also said she supports efforts by Congress to lower the regulatory burden on community banks, noting that they shouldn't be subject to the same policies as bigger banks. "I support increasing static and outdated statutory thresholds, including asset thresholds, that have not been updated for many years," she said. "Asset growth due, in part, to inflation and economic growth over time has resulted in small banks becoming subject to laws and regulations that were intended for much larger banks."
The regulator also said she supports improvements to the Bank Secrecy Act and anti-money laundering framework while minimizing unnecessary regulatory burden that disproportionately falls on community banks.
For large banks, the Fed is also working with other federal banking regulators to advance Basel III in the United States. "Finalizing Basel III reduces uncertainty and provides clarity on capital requirements, enabling banks to make better-informed business and investment decisions," she said. "My approach is to calibrate the new framework from the bottom up, rather than reverse engineer changes to achieve predetermined or preconceived outcomes to capital requirements."
It's also working to refine the G-SIB surcharge framework in coordination with broader capital framework reform efforts. "We must maintain a robust financial system without imposing unnecessary burdens that impede economic growth while carefully calibrating the surcharge to avoid inadvertently inhibiting the ability of the banking sector to support the broader economy," she said.
Other financial institution regulators also testified in the hearing. The heads of the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency pledged to examine occurrences of potential de-banking of individuals or corporations for political or other beliefs. "No American should be denied access to banking products and services because of political or religious beliefs or lawful business activity," said Jonathan V. Gould, U.S. Comptroller of the Currency.
"De-banking is never an appropriate activity," Bowman said in response to Sen. John Kennedy's (R-LA) criticism of regulators' use of reputational risk in supervising banks. The Fed has since removed that from its supervisory criteria.
Stablecoins and the Congress's GENIUS Act were also discussed. "Stablecoins are a golden opportunity" to boost demand for the U.S. dollar, said Kyle S. Hauptman, chairman of the National Credit Union Administration, in his opening statement.
The hearing was concluded at 12:16 PM ET.
11:50 AM ET: Bowman declined to comment on whether separate Department of Justice investigations into Chair Jerome Powell and Fed Governor Lisa Cook will hurt the credibility of the central bank. The independence of the Federal Reserve, though, is "critically important," she said.
11:18 AM ET: The Fed has launched an external review of the 2023 failure of Silicon Valley Bank to look at why the Fed didn't detect the problems at the bank earlier. "We're refocusing our supervision on material risks," Bowman said, noting that SVB had more than 40 MRAs (matters requiring attention) outstanding that were not related to material operating risks. She suggested that might have been a distraction that kept the Fed from focusing on the more severe risks.
10:57 AM ET: "Banks continue to be performing quite well," in the wake of the GENIUS Act being enacted, FDIC Chair Travis Hill said.
"Any material deposit flight would not go unnoticed," OCC's Gould said.
10:53 AM ET: Gould declined to comment about the approval process regarding World Liberty Financial's application for a bank charter. Sen. Elizabeth Warren (D-MA) requested to see the application to make sure the company has made the proper disclosures. World Liberty has President Donald Trump listed as co-founder emeritus. His three sons are all listed as co-founders.
Updated at 10:46 AM ET: The Fed would need to have authorization to suspend any so-called “skinny” master accounts created at the Federal Reserve if it appears it poses a risk, Bowman said. She was asked if the proposed accounts would involve lower guardrails. Fed Governor Waller has proposed such accounts for payment tech companies involving a more streamlined approval process.
The Fed expects to announce a new proposal for Basel III rules by the end of March, she said.
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