Bowman seeks bank input on plan to restructure supervision

• Expert quote: “These are ways that we’re exploring to ensure that we have that consistency, we have transparency, and that, ultimately, the vice chair for supervision has the ability to impact and influence the outcomes of the supervisory process.” —Federal Reserve Vice Chair for Supervision Michelle Bowman

The Federal Reserve’s top regulator wants banks to weigh in on her plans to reform the central bank’s supervisory structure, but they might not have much time to offer their thoughts. 

In an onstage event hosted by the Connecticut Bankers Association on Friday, Fed Vice Chair Michelle Bowman discussed her plans to install five regional directors to oversee bank supervision across the country. 

The change, which Bowman unveiled in a speech last month, aims to eliminate instances of states being split between more than one regional Fed bank and also bring more consistency to bank oversight, she said. It also redirects authority over supervisory preferences from individual reserve banks to the board of governors in Washington, D.C.

“These are ways that we’re exploring to ensure that we have that consistency, we have transparency, and that, ultimately, the vice chair for supervision has the ability to impact and influence the outcomes of the supervisory process,” Bowman said.

During the event, Bowman said she hopes to move forward with the new structure quickly and encouraged bankers to express their opinions on the reforms.

“It’s really helpful to hear from our banks about how they think about, you know, those divisions of states and … the feedback on the proposed structure that we’ve been talking about,” Bowman said. “My hope is that we’ll be able to move forward with that in the coming months.”

It is not clear whether the Fed intends to go through a formal notice-and-comment process before creating the regional directors. Likewise, it is not clear whether Bowman needs approval from the full board of governors before moving forward with such an action or if her position as vice chair for supervision allows her to proceed unilaterally.

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In her remarks Friday, Bowman said a key objective of the changes is to address the issue of states being split between multiple Federal Reserve districts — as is the case for 11 states, most of which border the Mississippi River. Bowman highlighted Tennessee as an example, noting that the western quarter of the state — from Memphis to roughly the Tennessee River — is part of the Federal Reserve Bank of St. Louis’s Eighth District, while the rest of the state is covered by the Atlanta Fed’s Sixth District.

Bowman argued that these divisions create issues for banks and state supervisors who must toggle between different examination practices and supervisory priorities depending on which reserve district they are operating in. 

“When you have different approaches to supervision that happen in one half of your state versus another half of your state, and your state examiners have to work within your borders but with different perspectives and approaches to the way we conduct examinations, it makes it very difficult to have consistency as you’re measuring a bank’s safety and soundness or their [supervisory] ratings framework,” she said.

The Fed’s 12 districts were established more than a century ago and were crafted to reflect the economies of distinct sections of the country. Politics also played a role, resulting in certain geographic peculiarities — such as two reserve banks being placed in the state of Missouri. 

Since the Fed system was established in 1913, the U.S. economy has evolved and become more integrated and many of the functions of the reserve banks — such as payments processing — have been centralized within the system. Supervision, particularly for banks not deemed systemically large, has remained squarely in the hands of the regional Fed banks. Bowman’s plan would upend that tradition in favor of something more board-driven.

During the discussion, Bowman said the Fed’s current supervisory structure has not served it well. She pointed to the 2023 failure of Silicon Valley Bank and her recently commissioned review of that event, which highlighted a “culture of uncertainty” within the Fed, driven by a lack of a clear chain of command.

Bowman said the way to resolve that issue is by putting oversight capabilities and authorities in the hands of the vice chair for supervision.

“When you have 12 different reserve banks and they have different reporting structures, that [doesn’t] allow the vice chair for supervision to have a transparent view and direction about how supervision is being implemented across the system,” Bowman said. “It makes it very difficult to make sure that we’re making our findings, citing our violations in a timely way that allows a bank to continue to be safe and sound and doesn’t allow for that critical deterioration.”