The Fed's new head of financial regulation has pledged to carry out massive reforms to U.S. banking rules, vowing to address industry concerns that regulations imposed after the 2008 financial crisis are too heavy.
Michelle Bowman, identified by the Senate as the Federal Reserve's vice chairman this week, used her first speech to develop plans to broadly reconsider key regulations.
Bowman, who has long criticized stricter capital rules, said regulations proposed after the financial crisis have always "pulled basic banking activities from the regulated banking system to the smaller regulated corners of the financial system".
“With the changes in the banking system over the past decade and now after implementation is behind us, it’s time to assess whether all of these changes continue to be relevant,” she said.
Her comments were popular with bank lobbyists. “Bowman highlights the significant impact of banking regulations on all Americans, far beyond the banking industry,” said Barbara Hagenbo, chief communications officer of the Financial Services Forum, which represents the largest U.S. bank. “These requirements can increase costs for consumers, small businesses and others, thus killing economic growth.”
Bowman said the Fed and other regulators will make recommendations “in the near future” to reform one of the main rules to determine how much capital the largest U.S. banks need to have – the so-called enhanced supplemental leverage ratio.
The rule requires large lenders to have a preset amount of high-quality capital, including their total leverage, including loans and assets such as asset statement exposure, such as derivatives.
Bowman responded to the latest complaint from Wall Street executives, saying the rule means “banks are less inclined to engage in low-risk activities, such as Treasury market middlemen and modify their business activities in ways that are neither reasonable nor responsive to customer needs.”
Bowman said indicating a broader reform of the capital framework, and the Fed will hold a meeting “to check whether the current structured and calibrated capital requirements operate as expected – in a complementary manner.”
“Eviction of all risks from the banking system does not match the basic nature of the banking business,” she said. “Banks must be able to make profits and grow while also managing their risks.”
She promises to “tailor-made” regulations so that it can be adjusted to the characteristics of each bank and remove “any outdated or overly heavy regulations.” Bowman also said she would seek to change the secret “oversight” rating used by central banks, which limits two-thirds of the largest banks to expand.
The Fed has responded to legal threats in the banking industry and is committed to reforming its annual stress test program, which binds many of the largest U.S. lenders to the level of capital. Bowman strongly supports the reform exercise.
“Although stress testing is an important oversight tool, its implementation, results and processes raise significant issues and concerns about its effectiveness in identifying system weaknesses,” she said.