Fed looking at how to address asset bubble caused by response to COVID-19 – including PPP

Regulatory challenges created by the rapid, but temporary, expansion of assets are being considered by the Federal Reserve, including how to address those trials, the agency’s designated representative of community banks said Wednesday.

In a speech to a research conference hosted by the Federal Reserve Bank of St. Louis, Fed Gov. Michelle Bowman – the designated community bank representative on the agency board – said asset growth prompted by the response to the coronavirus crisis has driven “meaningful asset asset growth, especially for smaller banks.” Bowman pointed to the “volume” of Paycheck Protection Program (PPP) loans as an example of the driver of the asset growth. (PPP loans were established by Congress in the March-enacted Coronavirus Aid, Relief, and Economic Security Act [CARES Act] to help businesses continue paying their employees in the face of the financial impact of the coronavirus crisis.)

“We recognize that for some institutions, this asset growth has caused many banks to exceed or nearly exceed certain asset-based thresholds contained in statutes, regulations, and reporting requirements,” Bowman said. “We are currently exploring how to address regulatory and supervisory challenges caused by this temporary asset growth.”

In other comments, Bowman told the group that community bankers consider the costs and burdens of regulatory compliance “the most significant threat to their existence.” However, she also acknowledged that some of those costs may have abated recently, which she credited actions by the Fed as helping. “This is consistent with what I heard from one Oklahoma banker, who said the biggest threat to his long-term survival was regulatory burden – but ‘not so much in the last few years,’” she said.

Nevertheless, she asserted that regulatory compliance costs on community banks is driving consolidation in banking. She said that research by the St. Louis Fed has found compliance expenses for smaller banks (those with less than $100 million in assets) averaged nearly 10% of total non-interest expenses. For banks with between $1 billion and $10 billion in total assets, compliance expenses averaged 5.3% of total non-interest expense, she said. “This suggests that the regulatory cost burden for the smallest community banks is nearly double that of the largest community banks,” she added.

The Fed governor indicated that community banks needed more than just regulatory “tailoring,” in which rule application is more closely aligned with the size and activity of a bank. “These banks may benefit from further regulatory relief, without undermining the goals of safety and soundness, consumer protection, and financial stability,” she said.

Gov. Michelle W. Bowman: Community Banks Rise to the Challenge