In a recent speech, Fed governor Michelle Bowman discussed bank culture, mergers and acquisitions (M&A), and liquidity.
She noted that the significant shift in regulatory approaches to banking industry M&A transactions is concerning.
The impact of a more restrictive M&A framework affects institutions of all sizes, including larger institutions that are vying to compete with the very largest global systemically important banks (G-SIBs). Banks of all sizes may choose to pursue M&A to pursue strategic growth opportunities and to remain competitive with larger peers that can achieve growth organically through sheer scale.
The consequence of limiting the growth options for any bank hoping to compete with the largest G-SIBs has the perverse, and unintended, consequence of actually further insulating the very largest institutions from competition. Against this backdrop, and while recognizing the value of M&A to the banking system, regulators must be pragmatic and thoughtful about reforms.
Based on the most recent data reported for 2023, a significant portion of M&A applications were withdrawn before approval, and the average processing time in the second half of 2023 was 87 days. The number of approved M&A transactions was also significantly lower in 2023 than it was in 2020, 2021, or 2022.
“As first steps, we must define the desired end state we are seeking to achieve with any changes. We must then identify the problem that needs to be solved and proffer a solution that is fair, transparent, consistent with applicable statutes, tailored for each bank category, and efficient. We should not propose a cure without first identifying an ailment and a reasoned basis for the prescribed outcome,” she said.
On liquidity, she discussed the regulatory focus on revisiting requirements after the failures of SVB, Signature Bank, and First Republic Bank.
During the banking stress in 2023 and the unprecedented speed of the bank runs that occurred, some banks experienced frictions in using the discount window and limits on the availability of payment services. These issues may have interfered with liquidity management activity and exacerbated the banking stress.
As one response, the Federal Reserve recently published a proposal to expand the operating hours of the Fedwire Funds Service and the National Settlement Service, to operate 22 hours per day, 7 days per week, on a year-round basis. The proposal also requested feedback on whether the discount window should operate during these same expanded hours.
“Expanded service hours are a concrete example of a change that is responsive to the issues experienced last spring, but my hope is that these changes are accompanied by other important operational improvements, including improved technology and operational readiness within the Federal Reserve System,” she said.
Bank liquidity has also been a prominent feature in reform discussions, focusing on whether the calibration and scope of the regulatory framework is appropriate. This includes the discussion of possible revisions to liquidity-related regulatory requirements, including liquidity stress testing and the liquidity coverage ratio, as well as shifting supervisory expectations for contingent funding plans and the availability of alternative liquidity sources.
Some policymakers have stated that a potential response to the 2023 banking stress would be to require banks to preposition collateral at the Fed’s discount window, and while policymakers have discussed potential regulatory reforms to implement this change, supervisory communications have already begun directing collateral prepositioning as a supervisory best practice. Some reforms, like encouraging bank readiness to borrow from the discount window if that is part of banks’ contingency funding plans, could be explored more thoroughly, she added.
“We must recognize that our prior efforts to reduce discount window stigma, as during the COVID period, have not been durable or successful, and that perhaps resources would be better devoted to making sure the discount window is prepared to act in a timely way, rather than adding even more regulatory requirements or supervisory expectations to banks that may complicate day-to-day liquidity management, with uncertain liquidity benefits during stress,” she said.