Three Quick Takeaways from Governor Bowman's Speech to the ABA
LISCC manual, adverse comments on bank mergers, Basel III endgame
Bright and early this morning Federal Reserve Board Governor Michelle Bowman delivered a speech at the American Bankers Association Conference for Community Bankers. Here are three things about the speech I found interesting, along with some context.
Bowman Expects LISCC Manual to Soon Be Published
The Federal Reserve Board maintains a Large Institution Supervision Coordinating Committee (LISCC). The LISCC supervisory program includes both reviews of firms on an individual basis and horizontal reviews of practices across firms.
Currently, banks in the LISCC portfolio are only the eight U.S. G-SIBs. (Previously a few large foreign banks were also included, but this was changed in late 2020.)
The Federal Reserve Board has provided a high-level overview of LISCC’s activities, but various aspects of the Board’s supervisory approach to LISCC firms are not completely clear.
This has bothered some people for a while. For example, in January 2020 then Vice Chair for Supervision Quarles recommended increased transparency:
I think we should consider publishing the internal procedural materials that the Fed uses to supervise the LISCC firms, sometimes referred to as the Program Manual. The Manual contains a description of the main supervisory processes for identifying risks and our approach for addressing them. Publishing the Manual would help the public and the banks better understand why we take the actions that we take as supervisors and would demystify some of our processes. If we took these two simple steps—defining LISCC firms and publishing the Program Manual that governs our supervisory approach—it would go a long way in helping to make our supervisory practices more understandable and accessible without undermining supervisory effectiveness.
According to Governor Bowman’s speech this morning, she expects a step to soon be taken in this direction.
Beyond these measures though, accountability also means having transparent policies and procedures and conducting supervision in a way that is predictable and fair. Transparency builds legitimacy and helps demonstrate that the Fed is executing its responsibilities in a fair way for all regulated institutions. … For example, I expect the Board will soon publish the supervision criteria implemented by the Large Institution Supervision Coordinating Committee—the LISCC manual. Banks should have some assurance that they are being held to the same standards as their peers over time. While publication of the manual may be only a modest improvement in transparency, I think it will be an important step.
Call for Reconsideration of How Adverse Comments on Merger Applications are Considered
Merger applications filed with the Federal Reserve Board may be approved either by the Board itself or by the regional Federal Reserve Banks acting under authority delegated to them by the Board. As Governor Bowman noted in her speech this morning, whether action under delegated authority is available can be a “key difference” in how quickly a merger application is processed.
Under the Board’s rules regarding delegation of authority to Reserve Banks, a Reserve Bank may approve under delegated authority an application requiring Federal Reserve Board approval unless any one of the following conditions are present:
A member of the Board has indicated an objection to the Reserve Bank approving the application under delegated authority;
The Board has indicated that delegated authority cannot be exercised by the Reserve Bank;
A written substantive objection to the application from the public has been properly made;
The application “raises a significant policy issue or legal question on which the Board has not established its position”;
The application may have adverse competitive implications (based on arguably dated deposit-based metrics);
In the case of a proposal involving nonbanking activities, the “nonbanking activities involved do not clearly fall within activities that the Board has designated as permissible for bank holding companies”; or
The proposed transaction warrants a closer look with respect to financial stability.
Of the above set of reasons that can bring an application up to the Board level, and as acknowledged by Governor Bowman today, “the most common reason is that the Board has received a protest on the application from a member of the public.” In recent approval orders, the Board has continued to cite to SR 97-10 as laying out the criteria for what does, or does not, count as a substantive objection.
Governor Bowman suggested this morning that it could be “helpful to consider whether this process could be improved, so that bona fide concerns raised by the public are appropriately considered, while still ensuring timely decision-making.”
I expect most readers have this background, but just for those who do not, Governor Bowman is a Republican appointee to the Board of Governors and her remarks (as with those of any Governor) should not necessarily be taken as speaking for the Board as a whole. That is not to say she is wrong, but it is just to acknowledge that it could well be the case that the Board and the other banking agencies ultimately elect to go in the other direction, and give the public more opportunities to comment on (at least some) merger applications.1
More Hints, But No Clear Guidance, on Which Banks Will Be Subject to the Forthcoming Capital Rule Revisions
As mentioned a couple of times previously on this blog, a key area of debate over the forthcoming changes to the Basel capital rules as applied in the United States is to which banking organizations the revised rules will apply. (Most recently discussed here.)
Today’s speech from Governor Bowman reaffirmed that the rules will apply to the “largest institutions” and that “there are no plans” to change the rules applicable to community banks.
The does not really answer the key open question: which large institutions? On this, Governor Bowman offered the following:
While I expect the Board will propose new capital requirements for the largest institutions, including the Basel III "endgame" reforms, I do not expect every tier of firms to be subject to the same changes.
Assuming, perhaps contrary to best practices, that anything should be read into this statement at all, if you are a bank in Category III of the Board’s tailoring framework nervously waiting to see whether or to what extent the new rules will apply to you, I am not sure whether you should be heartened or dismayed by this statement.
On the one hand, great, it sounds like the tailoring framework will be at least somewhat reaffirmed, with not all the rule changes applying to your bank. On the other hand, if you were hoping, as some have proposed, that the new rules would apply only to Category I and II firms, and not touch Category III firms at all, that is not quite how I read what Governor Bowman is saying.
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For example from Acting Comptroller Hsu in a speech last May: “In recognition of the value that public input can provide on mergers, the OCC is considering options to facilitate such input. For example, for mergers involving larger banks, the OCC is considering adopting a presumption in favor of holding public meetings.”
Of course, this is not necessarily inconsistent with Governor Bowman’s comments today, which were geared more toward community bank applications.