Fed Vice Chair for Supervision Michelle Bowman wants to raise the thresholds at which banks move into higher categories of oversight. The Federal Reserve plans to put forth a proposal by the end of the year to allow more banks to remain in the lowest level of regulatory scrutiny. Bowman outlined the plan in a speech in early October.
The forthcoming reforms will seek to increase the category entry thresholds, which are currently $100 billion for Category IV, $250 billion for Category III and $700 billion for Category II banks. Bowman said that expanding the range of institutions treated as community banks, and modifying supervisory expectations for them, would preserve safety and soundness while applying tailored supervision.
INDEXING THRESHOLDS TO ECONOMIC GROWTH
Bowman suggested adjusting the thresholds to align with the nominal growth in gross domestic product since 2019. She also noted that any revisions should index the thresholds to economic growth going forward, to save banking agencies from having to revisit the issue constantly.
On community banks, Bowman has not called for the $10 billion cutoff to be raised across the board. She has said that status should be extended to firms that continue to operate in a community bank fashion. "Looking ahead, we will reconsider these regulatory thresholds and will work to support Congress in updating thresholds that have become outdated and too low relative to the broader economy," she said.
HOW THE CURRENT FRAMEWORK WORKS
Since 2019, the threshold for a bank to be considered a community bank, and thus exempt from many of the more rigorous supervisory requirements, has been $10 billion of assets. Banks between $10 billion and $100 billion are categorised as regional banks, subject to more stringent rules. Those above $100 billion are deemed large banks and face enhanced oversight, phased in across four increasingly stringent tiers defined by asset size, cross-border activity and nonbank exposure.
Category IV banks face liquidity management and reporting requirements as well as the Fed stress testing regime, which brings a dynamic minimum capital standard under the stress capital buffer. The 2018 Economic Growth, Regulatory Reform and Consumer Protection Act granted the Fed discretion over how it tailors regulation of banks with assets between $100 billion and $250 billion.
Total assets held by commercial banks have grown from $17.7 trillion at the beginning of 2020 to more than $26 trillion today, an increase of nearly 50%. That is a compound annual growth rate of around 6%, exceeding even the elevated average annual inflation rate of around 4.5% over the same span.
BANKS AND ANALYSTS WEIGH IN
Irene Oh, chief risk officer of East West Bank, said the lender, which has about $86 billion of consolidated assets, has gradually been building up its compliance capabilities in preparation for reaching Category IV status once it crosses the $100 billion mark.
BOARD SUPPORT AND A REVERSAL OF DIRECTION
To advance her tailoring reforms, Bowman must win the support of a majority of the Fed Board of Governors, which still includes Michael Barr and two other Biden appointees. Three years ago, Barr, then vice chair for supervision, was considering reforms in the opposite direction, returning to a model that subjects more banks to enhanced prudential standards.
At the time, Barr argued that a 2019 change raising the threshold for heightened oversight from $50 billion to $100 billion contributed to the Fed's lax oversight of Silicon Valley Bank before its collapse. He resigned as the Fed's top regulator early last year to avoid a potential legal battle with the White House, which might have arisen had President Donald Trump moved to fire him.
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