Fed’s Bowman claims misguided focus on climate change played role in regulators’ tardy action in ’23 bank failures

Banking regulators should prioritize safety and soundness in 2024 – rather than broad, policy-oriented areas such as climate change – as a way of ensuring that the trauma created by the failures last year of three large, regional banks does not recur, the Federal Reserve Board’s designated member to represent community banks said late Monday.

In a speech to the community bank conference of the South Carolina Bankers Association in Columbia, S.C., Federal Reserve Gov. Michelle Bowman said last year’s stress caused by the failures of Silicon Valley Bank (SVB) of Santa Clara, Calif., Signature Bank of New York, N.Y., and First Republic Bank of San Francisco “validated the tenet that supervision, when implemented effectively and appropriately, is the single most effective tool to support a safe and sound banking system.”

Bowman said “every banker in this room knows” that “good old-fashioned risks” such as concentration and interest rate risks can create weaknesses that can be fatal to banks if not appropriately anticipated and managed. She recommended that regulators “resolve to renew the focus on these and other longstanding and fundamental risks to banks and the banking system.”

She indicated that the three banks’ failures last year arose from regulators’ failure to identify and focus on appropriate areas of risk. “Instead, the focus was on broader, more qualitative, more process- and policy-oriented areas of risk,” she claimed. “This focus resulted in a disproportionate emphasis on issues that distracted from the fundamental risks to the bank’s balance sheet.”

Bowman lambasted guidance issued last year on climate change, which she asserted illustrates the lost focus of the agencies – that is, away from safety and soundness.

“While perhaps well-intended, this guidance mandates a diversion of limited supervisory resources away from critical, near-term safety and soundness risks,” Bowman said. She maintained that the fundamental is whether climate change is a core, present-tense risk to safety and soundness – not whether climate change is an important public policy issue.

“And here, the evidence suggests that climate change is not currently a prominent financial risk to the banking system,” Bowman said.

Bowman said that the alleged lack of focus on material safety and soundness risks possibly comes from intentional policy preferences, “or simply may be the product of allowing ourselves to be distracted from known, longstanding risks over calm periods of banking conditions.”

“Whatever the cause, it comes at a significant cost, as both banks and regulators shift resources and supervisory attention away from the most pressing risks,” she said.

New Year’s Resolutions for Bank Regulatory Policymakers – speech by Fed Board Gov. Michelle W. Bowman at the South Carolina Bankers Association 2024 Community Bankers Conference, Columbia, South Carolina