The Federal Reserve should not “remotely” analyze a bank and downgrade its ratings without “communication and justification,” a member of the agency’s board told a Texas group Friday.
Speaking to the Texas Bankers Association in San Antonio, Fed Board Gov. Michelle Bowman said due process is key to bank examination by her agency. Bowman’s comments were made in the context of the regulator response in the aftermath of the recent failure of three, large regional banks, largely because of their reliance on uninsured deposits and exposure to interest rate risk. The three banks were 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 (early this month).
“Due process requires formal engagement between examiners and the bank,” Bowman said. “If our examiners believe there is a reason to be concerned with the condition of your institution, the examiners should notify you and engage directly with you to make sure that they have a clear understanding of all of the facts, and that any supervisory actions—including any discussion of ratings downgrades—are appropriate based on the unique facts and circumstances of the institution.”
Bowman indicated to the assembled bankers that they should be in touch with her other Fed Board members and reserve bank leaders about issues related to exams, examiners and supervision. She said CEOs of the largest banks “do not hesitate to engage directly with the Board and Reserve Bank presidents.”
“I see one of my many functions and roles as a member of the Board of Governors as providing that open door and opportunity for direct engagement with a policymaker for our regional and smaller banks, as well,” she said. “As a former banker, and bank commissioner, I know from experience that building a relationship is key to effective communication. And it’s always better to have made that connection before you need it.”
In other comments, Bowman reiterated her past call for an independent third party to analyze the events surrounding the failure of the three banks. She said that would allow the Fed to fully understand what led to their failures. “Before making conclusions about appropriate responses going forward to address causal issues, we need accurate, impartial, and thorough information to inform the debate about what specifically may be needed to fix any problems in our supervision and regulatory framework,” she said.
She also called for supervisors to do in focusing on and identifying key issues and risks to ensure they can be promptly remediated. “It is imperative that bank management, the board of directors, and supervisors understand bank business models, and risks that may emerge to threaten that model,” she said. “Where issues are identified, supervisors need to clearly explain the concerns, so that bank management can create a plan to address them. Regulators already have a comprehensive toolkit at their disposal to encourage issue resolution, and frankly, we need to use those tools appropriately, not create more tools because we failed to use the tools at our disposal.”
Bowman also repeated her skepticism in adjusting the bank regulatory framework in the wake of the failures. Even though she said adjustments may be considered, “our focus in doing so must be concentrated on identified problems and risks with clearly defined goals and outcomes.
“We should avoid using these bank failures as a pretext to push for other, unrelated changes to bank regulation. But, as we engage in this exercise, I think we need to carefully consider both the strength of the current regulatory framework and the effective implementation of tailored supervision.”
Gov. Michelle W. Bowman: Considerations for Revisions to the Bank Regulatory Framework
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