It's regulators' job to tailor rules for small banks: Fed's Bowman

Regulators have a duty to make sure policies are suited to the particular profile of community banks, Federal Reserve Board Gov. Michelle Bowman said.

In her first public speech since being confirmed to the Fed board, the former community banker and Kansas state regulator highlighted the strengths of smaller institutions while noting that the Fed continues to explore ways to tailor rules appropriately.

“Given the straightforward nature of community banking, regulators have an obligation to develop and refine approaches to supervision that fit the smaller size and less-complex risk profiles of these banks,” Bowman said Monday at a conference in San Diego hosted by the American Bankers Association.

Bowman is the first Fed governor to serve in a specially designated role as a member with community banking experience. She was formerly an executive at Farmers & Drovers Bank in Kansas.

She said in her speech that community banks pose little if any risk to the financial system at large.

In fact, she said, they play a vital role in providing financial services to small communities with few other options, particularly in small business lending. That puts the onus on the Fed and other regulators to ensure that its rules and regulations are not harming these institutions, she said.

“If we keep our focus on appropriately tailoring regulatory requirements for community banks so they may continue to prudently thrive, then community bankers should be able to devote more resources and time to serving their customers and communities,” Bowman said.

Regulators have undertaken some regulatory changes to help alleviate the regulatory burden that small banks face, she said, including a new community bank leverage ratio, a proposal to raise the value threshold for a mandatory mortgage appraisal, and an exemption from the Volcker Rule for community banks.

Bowman added that the Fed’s regulatory tailoring effort is beginning to have some results. There were no community bank failures in 2018, she said, and smaller institutions remain well capitalized. But small banks still need to keep an eye out for the types of credit concentrations that the Fed has observed recently in commercial real estate and agricultural lending, she said.

“While banks are performing well and loan portfolios are growing, we want to ensure that loans are underwritten prudently,” Bowman said. “We also want bankers to actively manage concentrations of credit risk, and be mindful that strong lending activity can strain liquidity.”