Regulator urges outside, third-party take close look at bank failures (even though her own agency has done so, twice)

Engaging an independent third party to conduct a review of the Federal Reserve’s actions before the failures of three large regional banks last spring was, again, advocated Monday by a member of the Federal Reserve Board – even though the agency has already produced two reports of its own about the failure.

In remarks before a combined conference of the Mississippi Bankers Association and the Tennessee Bankers Association in Banff, Canada, Federal Reserve Gov. Michelle W. Bowman said a third-party review should review and analyze a broader period than the limited one covered to date in the Fed’s own studies. She said that should include a broader range of topics and issues that she maintained are likely to identify further areas in need of reform.

“While this type of review would be an unusual step, it is appropriate where, as here, the existing limited reviews are driving the regulatory reform agenda, and where these bank failures have caused significant losses,” she said.

“Put another way, the purpose of an independent third-party review would be to analyze the events surrounding the failure of these banks, so that we can fully understand what led to the failures,” Bowman said. “This would be a logical next step in holding ourselves accountable. 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.”

Bowman asserted that the staff who prepared the already-completed, internal Fed reviews (one led by Vice Chair for Supervision Michael Barr, and the other recently prepared report by the Fed Board’s Office of the Inspector General), had greater capacity to review internal information and speak with staff. “But both of these reports themselves acknowledge their limited scope, related to the time constraints and the nature of the specific questions probed,” she said.

The Fed governor indicated that a third-party review could offer the agency “impartial, and thorough information to inform the debate about what specifically may be needed to fix any problems in our supervision and regulatory framework.”

Regarding additional bank regulations in response to the failure of the three banks (Silicon Valley Bank (SVB] of Santa Clara, Calif.; Signature Bank of New York, N.Y., and First Republic Bank of San Francisco), Bowman suggested that the banking agencies may be acting too hastily.

She said regulators should “carefully consider” whether their approach is appropriate in the moment, posing several questions to be asked:

  • Are the federal banking agencies acting in a consistent manner in their bank supervisory activities?
  • Are federal banking agencies coordinating appropriately with state banking agencies when reviewing state-chartered banks?
  • And fundamentally, are supervisory decisions being driven by a comparison or horizontal review of differences among institutions that may have very different business activities and risk profiles?
  • Are supervisors acting pro-cyclically, or overreacting to the events of March 2023?

“Asking these questions can help us appropriately calibrate our revised approach to banking supervision and help us avoid reacting in a way that is disproportionate to an institution’s risk to the banking system,” she said.

Gov. Michelle W. Bowman: Brief Remarks on the Economy and Bank Regulation