Fed's Bowman Restructures Bank Supervision Into Five Regions

The Federal Reserve will reorganize how it supervises banks into five regions, each led by one official accountable for all supervisory activity in that region, Fed Vice Chair for Supervision Michelle W. Bowman said Tuesday, Oct. 6. She announced the change in a speech at the Community Banking Research Conference in St. Louis.

"Today, we begin to restructure the Federal Reserve's supervision function," Bowman said. The regions will follow state boundaries rather than Reserve Bank district lines. Examiners will stay in their current Reserve Bank offices and keep overseeing the banks they supervise now, she said.

What did Bowman announce?

Bowman tied the overhaul to a mismatch between decision-making authority and accountability that the Starling Advisory Group flagged last month in its preliminary report on the failure of Silicon Valley Bank. She said a "complex web of dozens of committees" had become "a source of delay" and a barrier to prompt action.

She also laid out regulatory work still to come:

Item	What Bowman said
Asset thresholds	Board will consider raising fixed-dollar thresholds later this year, with an update every five years
Community bank definition	Set at under $10 billion in assets for 15 years; broader reforms and large-bank tailoring updates to be considered later this year
Regulation O (insider lending)	Proposed in July; not comprehensively updated since 1979
CAMELS ratings	Revisions being finalized; the "M" (management) rating will no longer singularly drive a composite rating
Bank mergers	Fed's competitive analysis is "antiquated" and understates competition

Source: Federal Reserve.

The Fed said Oct. 2 that it extended the comment period on its Regulation O proposal to Nov. 4 from Oct. 5.

Why does bank supervision matter to private lenders?

Banks are both competitors and capital sources for non-bank lenders. Many private lenders fund loans on bank warehouse lines, and banks compete with debt funds for commercial real estate loans, as CBRE's lending data showed.

Bowman did not discuss credit lines to non-bank lenders or commercial real estate lending. But her agenda points toward lighter, more tailored rules for smaller banks. She said supervision should focus on risks that could cause "material financial harm" rather than "process over substance." Supervisory expectations should be "transparent, clear, and consistent," she said, adding that a bank "should not learn about and then be held accountable for changed expectations during an examination."

Nonbank lenders counted as competition

In arguing for changes to merger reviews, Bowman said the Fed's analysis "systematically understates the competition banks in these markets face—downplaying or ignoring credit unions, nonbank lenders, farm credit institutions, and branchless banks." She said that hurts rural banks in small and underserved markets that may want to merge.

She also pointed to steps already taken. The Fed, the OCC and the FDIC moved the community bank leverage ratio to the statutory level of 8%, she said, and the Fed published third-party risk-management guidance that includes a guide tailored to community banks.

For more on funding and bank relationships, see our Capital and Funding section. For the credit backdrop, read our report on CMBS delinquency rising to 8.02% in September.