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Bowman: Regulatory thresholds, deposit insurance need more research

by Cedric Guzman

The Importance of Evidence-Based Approach to Bank Regulation, According to Federal Reserve Governor Michelle Bowman

Federal Reserve Governor Michelle Bowman recently emphasized the importance of an evidence-based approach to bank regulation, highlighting the need for research and discussion regarding regulatory thresholds for banks and the deposit insurance framework. Speaking at a banking conference co-hosted by the Federal Deposit Insurance Corp. (FDIC) and the Conference of State Bank Supervisors, Bowman emphasized the need for a comprehensive understanding of the root causes of bank failures and the potential costs and unintended consequences of reforms.

Bowman stressed the need for evidence-based rulemaking to identify and address specific problems within the banking sector. While bank failures demand scrutiny, they do not justify wholesale revisions to the regulatory framework. Instead, Bowman advocated for targeted, efficient solutions crafted through data analysis and research to avoid overreactive and ineffective regulation.

One area that Bowman questioned was the long-standing $10 billion-asset threshold used to define community banks. She called for a reevaluation of asset size thresholds and a consideration of business models when tailoring rules to ensure that incentives promote prudent lending while appropriately balancing risk.

Furthermore, Bowman highlighted the importance of researching bank funding models and deposit infrastructure. As this year demonstrated, money movement can pose unprecedented risks, and the framework must evolve to support modern technology-driven banking. Bowman emphasized the need to ensure that the regulatory framework supports the banking system of tomorrow rather than the system of yesterday.

The FDIC’s May report on deposit insurance coverage also caught Bowman’s attention. She viewed the report not as a call for policymakers to react to a crisis but as an opportunity for the research community to provide evidence-based research and analysis on deposit insurance coverage options. Extensive shareholder engagement, public dialogue, and insights from community bankers are necessary to complement the study and ensure a comprehensive understanding of evolving deposit practices.

Bowman also reiterated her call to update and modernize the banking framework. She argued that bank mergers and acquisitions should not be seen as limiting community lending, as combining two financial institutions in certain markets might offer the only path for community banks to survive. Additionally, she questioned the assumption that credit unions do not compete with banks, citing the trend of credit unions acquiring community banks and suggesting a reassessment of this viewpoint.

In her concluding remarks, Bowman urged policymakers to exercise restraint and patience when considering policy issues. Well-calibrated policies that incorporate the costs, benefits, and impacts of reform should be the goal, avoiding complicating or contradicting the existing regulatory framework.

In summary, Federal Reserve Governor Michelle Bowman’s speech highlighted the importance of an evidence-based approach to bank regulation. Thorough research and discussion are necessary to address regulatory thresholds, reform the deposit insurance framework, and ensure that the banking system is prepared for the challenges and risks of the future.

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