Fed Governor: Regulators Just ‘Don’t Understand’ Implications of New Rules

A Federal Reserve official on Tuesday criticized his regulatory policy colleagues for underestimating the burdens new regulations for the banking sector.

Governor Michelle Bowman, speaking at an event hosted by the Kentucky Bankers Association, said other regulators do not understand the consequences policies they have proposed and adopted in recent years. She said the problem stems from a basic lack of banking experience among key officials.

“We need more people who understand banking and have been involved in banking in policymaking,” Bowman said. “Until you have that background in that regulatory role, it’s hard to understand the burden we’re putting on people.”

The lack of real-world experience is particularly evident in the case of merger review processboth at the Fed and among other regulators, she said. The process is cumbersome and time-consuming, which makes it difficult for banks of all sizes to operate in ways that those without industry experience often don’t see, Bowman said.

“They don’t understand the consequences this has, both intended and unintended,” she said.

Bowman’s comments came on the heels of statements from the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency finalizing new rules for reviewing merger applications. The changes are consistent with the Department of Justice’s updated merger guidance.

While the Fed hasn’t formally changed its approach to mergers and acquisitions, Bowman said it has changed its application form to require more estimates of how a proposed merger will impact the project. The agency has delayed approvals of recent applications, making mergers more costly and difficult, she said.

Drawing on her own experience working at a family bank — Farmers & Drovers Bank in Council Groves, Kansas — Bowman said this more rigorous approach to bank mergers is especially challenging for resource-constrained community banks that often rely on mergers and acquisitions for growth or succession planning.

“It’s important to understand that often the best outcome for a community or a financial institution is a merger or an acquisition,” she said. “You can have better geographic reach for customers, there are succession planning issues … there are a lot of challenges, but there are a lot of great benefits to mergers, acquisitions and creating new banks.”

Fintech Partnerships

The lack of experience in banking also affects regulators’ approach to partnerships with third parties, including financial technology groups, Bowman said.

Banks should not be penalized when their fintech partners fail to honor agreements on certain compliance issues, she said. Often, banks don’t know they’re working with entities that have deficiencies or that have been placed on regulatory watchlists until they sign agreements with the groups, Bowman said, noting that agencies can’t warn banks about these groups in advance because of the sensitivity of confidential regulatory information.

“We don’t have safeguards for banks to work with vetted, certified partners that regulators consider legitimate,” Bowman said, adding that she would like to see the Fed reinstate its office hours program, through which banks, fintech firms and reserve bank regulators could connect, which collapsed during the COVID-19 pandemic.

Liquidity

Bowman also touched on liquidity reform.

Bank regulators haven’t introduced new rules on the issue — instead opting to update guidance on liquidity management and use of the discount window — but they have concerns about some of the reforms being discussed. They include policies that would cause banks to move away from using Federal Home Loan Banks as a source of funding or toward using the Fed’s discount window.

Some of these proposals would deprive individual banks and bankers of choice, Bowman said.

“People who have never run a business don’t realize how important it is how we choose services,” she said.

Dispute

Bowman also addressed the impact of the Loper Bright Enterprises v. Raimondo decision in June, in which the Supreme Court overturned a long-standing legal precedent known as the Chevron deference. That rule gave agencies broad authority to interpret ambiguous legal rules. Without it, that authority would now be transferred to the courts.

Bowman said the decision positively changes the way agencies calculate when creating regulations.

“The risk of litigation is already a scary thing about how agencies think about new regulations,” she said. “I think that’s a great influence on our regulatory process and will help us move forward.”