Dive Brief:

• Federal Reserve Vice Chair for Supervision Michelle Bowman on Wednesday indicated forthcoming updates to asset thresholds, suggesting tying the benchmarks to nominal gross domestic product. 
• The Fed plans to reconsider asset thresholds used in bank regulation and support Congress in updating outdated benchmarks or those that have become too low relative to the economy, Bowman said at a California Bankers Association seminar.
• “A simple solution would be to adjust thresholds by nominal GDP, which includes both economic growth and inflation,” Bowman said. “Doing so will result in a more robust and resilient system over time, proactively integrating indexed changes into the framework.”

Dive Insight:

Also Wednesday, House Financial Services Committee Chair French Hill, R-AR, and Rep. Andy Barr, R-KY, put forward a community banking legislative package that would, among other things, index asset-based regulatory thresholds to nominal GDP.

Classifying banks by a single, fixed asset level, such as community banks having less than $10 billion in assets or a large bank having more than $100 billion in assets, “relies only on the bank's asset size regardless of its activities, business model, or risk profile,” Bowman noted during her remarks. “Among many other shortcomings, this approach does not account for economic growth and inflation over time.”

Bowman went on to question whether such single-metric thresholds “are the most effective way to align statutory, regulatory and supervisory requirements with the underlying risk of the activity, or whether a more nuanced approach may be appropriate.” 

Such an approach, she said, could take into account business models and risk profiles. She said she also supports “a comprehensive approach to indexing statutory requirements broadly across all financial agency authorities.”

Changes to thresholds could delay the transition to Category II or III for some banks, J.P. Morgan Securities analyst Vivek Juneja wrote in a Thursday note. “In our view, US Bancorp has been doing asset securitizations and sales to delay getting to the $700 bil mark for Cat II.”

Indexing to nominal GDP “would result in a significant increase to current thresholds,” Juneja said, since third-quarter U.S. GDP is up 49% from the end of 2018. That could have the $100 billion threshold for Category IV banks rising to about $140 to $150 billion, he wrote. 

“Similar adjustments could apply to other category thresholds, including the $250 bil threshold for Category III banks (implies ~$350-370 bil) or $700 bil threshold for Category II (implies ~$1 tril),” Juneja wrote.

Bowman also noted the Fed is assessing how it doles out certain supervisory ratings for lenders. Bank exam findings and reports “must focus on material financial risk,” Bowman said, echoing a term she’s used repeatedly during her tenure.   

The Fed is implementing several initiatives related to that approach, she said, such as revisiting the standard for issuing matters requiring attention and matters requiring immediate attention; ensuring CAMELS ratings reflect a bank's risk profile and financial condition, and that the “M” for management is judged on measurable factors; and reviving the use of nonbinding supervisory “observations,” labeling notable matters that don’t rise to the level of an MRA or MRIA. 

CAMELS stands for capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk. 

With community bank relief in mind, Bowman also hinted at changes to regulatory applications and data collection, noting the requirement to provide data or other information “creates a disproportionate burden on community banks.” And she highlighted the need for greater transparency, alluding to the expansive definition of confidential supervisory information inhibiting information-sharing among banks.   

Bowman’s suggestions Wednesday add to the list of regulatory and supervisory changes the Fed has pursued during the second Trump administration. The central bank, in tandem with the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, has proposed recalibrating the community bank leverage ratio to the statutory minimum, changing the required level of capital for community banks electing the CBLR from 9% to 8%.

The Fed has also modified the enhanced supplementary leverage ratio, sought to revise and enhance stress testing, and will announce “additional regulatory changes to improve the fairness, transparency, and prioritization of the supervisory process” in the coming weeks, Bowman said.

The legislation Hill and Barr unveiled Wednesday also seeks to emphasize tailoring in bank regulation, and clamps down on debanking. It also prioritizes supervision based on material risks tied to safety and soundness, and prohibits reputational risk’s use in bank exams. Additionally, the legislation aims to phase in capital requirements for new banks and provide certainty around regulatory approvals of mergers and acquisitions.

While Trump-appointed bank regulatory heads laid the groundwork for some of those changes in the past year, Hill has indicated he wants to “make a permanent change” by enacting legislation, in an effort to avoid the “seesaw back and forth between administrations,” Roll Call reported this week.    

“Over the past year, the Subcommittee on Financial Institutions under Chair Barr’s leadership has worked tirelessly to examine outdated regulations, listen directly to small businesses, and confront barriers to access capital for small and mid-sized banks,” Hill said in a statement. “I am proud to introduce the Main Street Capital Access Act with Chair Barr to reinvigorate our community banks and return commonsense back to Main Street.”