Governor Michelle Bowman delivered her remarks at the CEO and Senior Management Summit and Annul Meeting in Colorado Springs, which was sponsored by the Kansas Bankers Association.

The governor started by outlining her thoughts on economic and monetary policy. She suggested that considerable progress has been made, but that “inflation is still uncomfortably above the Committee’s 2% goal.”

She further added that she did not have confidence that “inflation will decline in the same way as in the second half of last year,” and she suggested that previous progress on inflation was due to supply-side improvements including:

• easing of supply chain constraints;
• increases in the number of available workers due to the continuing strong pace of immigration and labor participation rate increases;
• lower energy prices.

According to the governor it is unlikely that further improvements connected to these factors will lower inflation in future, with supply chains normalizing, labor force participation levelling off and immigration that may be decreasing.

Economic activity

Economic activity has moderated with consumers pulling back on discretionary items and expenses as higher prices continue to “weigh on consumer sentiment,” hitting lower-income households hardest. But a positive development is that the labor market is coming into better balance despite the fact that the unemployment rate remains near historic lows.

Upside risks on inflation include:

• geopolitical risks;
• increased immigration leading to high housing services inflation;
• some uncertainty as to the actual state of the labor market.

She concluded this part of the speech by saying that “restoring price stability is essential”. It was the upside risks that were most eye-catching because they seem to reflect not only the situation in the United States, but also issues that many of the countries around the world are contending with at the moment. Immigration in particular is not only contentious politically, it poses a significant dilemma for economic policy and the decision makers shaping it.

“[Culture] can have a strong influence on both business outcomes and on compliance and risk-management outcomes.”

Bowman then turned to the role of culture at banks and regulators and pointed out that it “can have a strong influence on both business outcomes and on compliance and risk-management outcomes.” She asserted that while it starts at the top, bank culture “demands accountability for bank leadership teams and for the entire work force” and is ultimately shaped by “the actions of each bank employee.”

Interestingly she made a similar point about culture at a regulatory agencies, pointing out the recent “high-profile examples of problems with the culture” at the FDIC. She highlighted some key questions regulators should pose to themselves to assess their own performance – namely whether they have:

• created a culture that allows the staff to identify and escalate issues of concern?
• created a culture of accountability for leaders and employees, where shortcomings can be fairly identified and actions can be taken to remediate problems?
• oriented the mission of the institution around core statutory goals and avoided the temptation to stray from this mission into other matters of public policy?

This last point seems crucial in the sense that regulatory overreach is something that regulators are censured for on a regular basis both by industry, politicians, and the law courts.

She pointed to the recent failure of SVB as one that revealed “problems with bank leadership in promoting a compliance and risk-management culture commensurate with growth” but also one that highlighted that the same rapid growth was a “contributing factor to the inadequacy of the supervisory approach.”

Efforts to reform

The governor then made some critical remarks about reform efforts connected with bank M&A that may result in a more restrictive framework for institutions of all sizes. In the governor’s view the competitive international landscape as well as the importance of the banking system mean that M&A plays a critical role in a healthy banking system. And she finds it “concerning” that the existing record of performance as well as proposed reform efforts suggest that “barriers to bank M&A activity remain substantial.”

Finally, this wide-ranging speech covered developments in bank liquidity requirements in response to the bank management and supervisory failures that led to the collapse of SVB, Signature Bank and First Republic Bank.

Bowman suggested that the unprecedented speed of the bank runs meant that some banks experienced “frictions” in using banking system liquidity tools such as the discount window (a last resort source of liquidity). Issues with these “may have interfered with liquidity management activity and exacerbated the banking stress.” And the governor argued that it is important that the technology underpinning these services is enhanced.

She is sceptical of efforts to reduce “discount window stigma” by, for example, prepositioning collateral at or encouraging bank readiness to borrow from it. She questioned whether “adding even more regulatory requirements or supervisory expectations” will achieve the hoped for outcome of making this tool and its operational effectiveness more robust. She advocated, instead, for the use of resources to ensure that “the discount window is prepared in a timely way.”

She concluded by asserting that rapid and transformational change in regulation may result “in harmful unintended consequences to the banking and financial system” increasing financial system uncertainty and instability and potentially complicating both day-to-day operations and long-term planning.

She argued instead for thoughtful, deliberate and incremental change with a focus on statutory obligations as one that will produce better outcomes including helping to “build public support and trust.”