Dive Brief:

• The Federal Reserve is restructuring its bank supervision function, opting for five regions defined by state borders rather than the district boundaries of its 12 reserve banks, Michelle Bowman, the central bank’s vice chair for supervision, said Tuesday.
• The move, informed by the Conference of State Bank Supervisors’ regional structure, is designed “to implement a culture of accountability and clear decisionmaking authority,” Bowman said at this year’s Community Banking Research Conference in St. Louis.
• The Fed also plans to improve the role and use of committees in supervision, with Bowman noting “a complex web of committees” within the reserve bank system has caused delays and obfuscated decision-making responsibility.

Dive Insight:

The consolidated structure will hold regional leaders accountable for supervisory activity within their zone, Bowman said. Fed examiners will remain at existing reserve bank locations and continue to oversee the banks they already supervise.

“This approach clarifies accountability and decisionmaking and enables a consistent application of supervision,” she said. 

Adhering to state lines rather than reserve bank district boundaries can help the Fed “coordinate more effectively and efficiently with our state and federal regulatory partners,” Bowman said. “The regional structure creates scale in our operations. It simplifies our leadership structure while preserving local supervision by examiners.”

Revamping the central bank’s organizational structure is intended to tackle structural issues that hinder the Fed’s ability to conduct supervision optimally, according to Bowman.

The web of committees, for example, “became a source for plausible deniability and a disincentive for examiners to take prompt and decisive action to address identified risks,” prompting the need for improvements, she said.

Bowman referenced the recent Starling Advisory Group preliminary report on the failure of Silicon Valley Bank, which highlighted “a long-standing structural issue in the supervisory function — a mismatch between authority for decisionmaking and accountability for supervisory decisions.”  

The Fed’s existing structure has “disincentivized” a link between responsibility and accountability, with the committee web causing further complication, leading to dysfunction, she said. 

“We have to address long-standing issues embedded in our institutional culture, long-held assumptions and beliefs, and institutional inertia,” Bowman said. “But in the context of bank supervision and regulation, we must not be distracted from our core mission of safety and soundness while we achieve these goals.” 

Bowman is taking the examiner playbook — identifying and addressing the root cause — and turning it inward, said Roman Goldstein, senior director at financial services consulting firm Klaros Group. The Office of the Comptroller of the Currency made a similar move in 2013.

The result was improved supervision, “but it took years,” he said in an email. “Changing an organization's culture takes time.”

Christopher Appel, director of banking policy at nonprofit advocacy organization Better Markets, said he’s “very skeptical” that reorganizing reporting lines as Bowman proposed is going to deliver improvements in Fed supervision. 

“The ultimate test is whether Fed examiners are going to one, identify risks earlier and escalate them, and then, most importantly, whether the management of the supervision division is going to support them to the extent that their recommendations can preemptively address safety and soundness issues,” he said in an interview. 

That’s what was missing in the run-up to the SVB crisis, and whether that's actually happening at the Fed is unclear, he said. 

“Adding another layer of bureaucracy or removing someone's responsibility or removing someone's authority, in and of itself, really doesn't give us enough information,” Appel said.  

Bowman also said the Fed, later this year, will consider broader structural reforms to bank portfolios defined by asset size and updates to the large bank tailoring framework.