Fed’s Bowman says regulators can compromise on bank capital plan with ‘substantive changes’

By Pete Schroeder

WASHINGTON (Reuters) -Federal Reserve Governor Michelle Bowman said on Wednesday a proposed plan by regulators to hike bank capital requirements has shortcomings, but that she is optimistic policymakers can compromise on a final rule.

Bowman, who voted against the so-called “Basel endgame” proposal in July as overly restrictive on banks, reiterated her concerns with how much capital banks would be ordered to hold under the tentative plan. But if regulators agree with industry concerns on the proposal and significantly step back the impact, she suggested she could support advancing the rule-writing effort.

“The agencies are obligated to think carefully about the best path forward for this proposal. This should include making substantive changes to address known deficiencies,” she said in prepared remarks before the U.S. Chamber of Commerce, the nation’s largest business lobby.

It is unclear how much purchase Bowman’s recommendations will make at the Fed, where Vice Chair Michael Barr is leading the rulewriting effort. Barr has argued banks need to hold more capital to guard against risks, particularly in the wake of 2023 turmoil that saw several larger firms fail.

The Fed advanced the capital proposal despite objections from Bowman and Fed Governor Christopher Waller, who said Tuesday the rule should be rewritten. But Fed Chairman Jerome Powell, who voted to advance the proposal, has said he believes any final rule should have “broad support.”

Bowman said regulators should significantly reduce the amount of capital banks would be ordered to hold under the proposal, which is aimed at refining rules to better prescribe capital cushions against the risks banks take. She noted prior regulators had suggested similar rules that would effectively keep capital flat at banks.

She also called on regulators to abandon efforts to impose tougher rules on smaller banks. Barr moved to apply stricter requirements applied to large global banks to firms with over $100 billion in assets after recent failures of banks around that size. But Bowman contends the approach is a “fundamental flaw” that can distort how banks around that size operate.

“Relying simply on the ‘more is better’ approach downplays or ignores…critically important tradeoffs,” said Bowman.

(Reporting by Pete Schroeder; Editing by Andrew Cawthorne and Andrea Ricci)