Regulators need to take fresh look at recent bank failures, including third-party review of what went wrong, Fed governor says

Banking regulators should take additional steps to understand the recent failure of three banks, and hold themselves accountable, a governor of the Federal Reserve said Friday – including by conducting an independent, third-party review of what went wrong.

Speaking to the 21st Annual “Symposium on Building the Financial System of the 21st Century” in Frankfurt, Germany, Fed Gov. Michelle Bowman outlined three steps for regulators to consider in the wake of the failures of Silicon Valley Bank (SVB) of Santa Clara, Calif., Signature Bank of New York, N.Y. (both in March), and First Republic Bank of San Francisco (in late April).

The first step, she said, would be for the Fed to engage an independent third party to develop a report to supplement one already issued about SVB by Fed Board Vice Chair for Supervision Michael Barr. She said that approach would “help to eliminate the doubts that may naturally accompany any self-assessment prepared and reviewed by a single member of the Board of Governors.”

The second, Bowman said, would be a better job by regulators of “identifying the most salient issues” and moving quickly to remediate them. “It is clearly evident that both supervisors and bank management neglected key, long-standing risk factors that should be an area of focus in any examination,” she said. “These include concentration risk, liquidity risk, and interest rate risk.”

The final step, she said, would be for regulators to consider whether there are necessary, targeted adjustments to be made to banking regulation. She indicated those changes should cover a broad range of topics, including deposit insurance reform, treatment of uninsured deposits, and a reconsideration of current deposit insurance limits.

However, Bowman also indicated there should be limits to regulatory changes in the wake of the bank failures. “We should avoid using these bank failures as a pretext to push for other, unrelated changes to banking regulation,” she said. “Our focus should be on remediating known, identified issues with bank supervision and issues that emerge from the public autopsy of these events.”

The Fed governor warned that “radical reform” of bank regulations “are incompatible with the fundamental strength of the banking system. I am extremely concerned about calls for casting aside tiering expectations for less complex institutions, given the clear statutory direction to provide for appropriately calibrated requirements for these banks.”

She contended that the failed banks – all large, regional institutions – all had unique business models. Because of that, she warned, there is no justification for imposing “new, overly complex regulatory and supervisory expectations on a broad range of banks.”

“If we allow this to occur, we will end up with a system of significantly fewer banks serving significantly fewer customers,” she said. “Those who will likely bear the burden of this new banking system are those at the lower end of the economic spectrum, both individuals and businesses.”

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