Commentary by Steven Lofchie

Federal Reserve Board Governor Michelle W. Bowman questioned whether “the volume of [banking regulatory] reforms that have been proposed, recently finalized, or that are in the pipeline … [reflects a loss of focus] on furthering the primary goal of prudential bank regulation and supervision.”

In a “Workshop on the Future of Banking,” hosted by the Federal Reserve Bank of Kansas City, Governor Bowman observed that regulatory responses to the failures of Silicon Valley Bank and Signature Bank “have little relationship to the events surrounding the bank failures and ensuing banking system stress.” She highlighted two concerns: the stagnation of de novo bank formations and the restrictive approaches to bank mergers and acquisitions.

De Novo Bank Formation. Governor Bowman raised concerns over the decline in the number of U.S. banks and the stagnation in de novo formations over the past decade, in light of indications of unmet demand for banking services. She argued that the regulatory and supervisory framework, particularly the lengthy and uncertain application process for new charters and deposit insurance, poses significant obstacles to de novo bank formation. She said that current regulations contribute to delays, increase start-up costs and pose challenges for securing investment. She warned that regulatory expectations can be unclear and that the long-term absence of new bank formation risks (i) reducing the availability of credit, (ii) limiting financial services in underserved areas and (iii) pushing banking activities outside the regulated framework.

Bank Mergers and Acquisitions. Governor Bowman raised concerns about the evolving approach to bank mergers and acquisitions which increases the potential for adverse impacts on the banking system. She said that proposed reforms could introduce delays, create uncertainty and impose new standards that may deter both de novo bank formation and healthy M&A activities. Further, she argued that the regulatory process itself is concerning, noting the prolonged regulatory timelines, the potential requirement to disclose concerns publicly for withdrawn applications and the possibility of regulatory demands not based on statutory requirements. She said that these factors (i) complicate succession planning, (ii) risk creating uncompetitive “zombie banks” and (iii) restrict the strategic options for growth and exit. She said that these factors threaten the dynamism and health of the banking sector.

Commentary by Steven Lofchie

Governor Bowman has been a consistent critic of what she believes are the failures of banking regulators to support new rules with a proper analysis of costs and of their failure to focus on those issues that should be matters of their primary focus (i.e. prudential bank regulation and supervision, rather than e.g. climate change.)