In first speech, Fed governor warns community banks about rising credit risk concentrations

Banks should be actively managing concentrations of credit risk and be mindful that strong lending activity can strain liquidity, the community bank representative on the Federal Reserve Board told community bankers Monday.

In a speech to the American Bankers Association (ABA) Community Bankers Conference Monday in San Diego, Federal Reserve Board Gov. Michelle (“Miki”) Bowman said that, overall, community banks are in strong financial condition, maintaining high common equity tier 1 capital levels, which are consistent with the “well-capitalized” designation under regulatory capital standards.

But she warned things can change. “While banks are performing well and loan portfolios are growing, we want to ensure that loans are underwritten prudently,” Bowman told the group. “We also want bankers to actively manage concentrations of credit risk, and be mindful that strong lending activity can strain liquidity. For example, concentrations of commercial real estate are rising, and are quite high at some banks, prompting us to remind bankers of the difficulties that such concentrations presented in the past.”

In other comments during her speech – the first she has delivered as a member of the Fed Board – Bowman urged the group to comment on recent proposals from the Fed, such as the community bank leverage ratio (CBLR), issued Friday by the Fed, the Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC). The proposal – issued for a 60-day comment period, closing April 9 – would create a simpler capital framework for certain depository institutions and depository institution holding companies under $10 billion in assets.

She also urged the bankers to weigh in on a proposal raising to $400,000 the threshold for determining when an appraisal is required for a residential real estate transaction, and excluding community banks from the Volcker Rule.

During a question-and-answer session with ABA President and CEO Rob Nichols following her prepared remarks, Bowman said:

  • She supports the framework for reform of regulations implementing the anti-redlining Community Reinvestment Act (CRA) outlined by her fellow Fed Gov. Lael Brainard, but noted there is room for change. “The problem I’ve seen as CRA has been implemented and as the years have gone on is that there’s a lack of clarity and a lack of transparency in the examination process and how banks are measured with the activities they engage in with respect to those principles (of the CRA) during the examination process.”
  • The Fed has “worked expeditiously” to put into effect provisions of last year’s regulator reform legislation, the Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA, S. 2155), she said, noting that she had never seen a federal agency move as fast as the Fed has done (so far) in putting the law into effect, covering seven either final or proposed rules. However, she also pointed out that she was not a member of the Fed Board when most of the rules were finalized or proposed.
  • Fintech is an important issue within banking regulation, she said, noting the Fed’s position is innovation “a good thing.” However, she also said that with innovation comes risk, and banks will have to own the risks that come with partnering with financial technology innovators.

Bowman prepared remarks: A Conversation on Community Banking

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