The Federal Reserve announced new guidance this month that its bank regulators should focus on material financial risk and not processes, a move that was welcomed by the Arkansas banking industry.
But an Arkansas finance professor says the broad-stroke guidance from the Fed needs more details before it will be clear exactly what the changes will look like in practice.
The move won’t directly impact all Arkansas banks. State-chartered banks are regulated by the Arkansas State Bank Department and either the Federal Reserve or the Federal Deposit Insurance Corp. Federally chartered banks are regulated by the federal Office of the Comptroller of the Currency. All holding companies are regulated by the Fed.
Most Arkansas banks are state-chartered and 46 of them have chosen the Fed as their federal regulator.
Material financial risk was not defined by the Fed but generally refers to circumstances that will directly impact the health of the bank, like its assets, asset quality, earnings or credit losses.
The move was announced by Michelle Bowman, who joined the Fed’s board of governors in 2018 and became the board’s vice chair for supervision earlier this year. Bowman is also a former state bank commissioner in Kansas and a former vice president of a Kansas bank.
In a statement, Bowman said the change would allow the regulators to sharpen their focus.
“This is not about what we are leaving behind — it is about building a more effective supervisory framework that truly promotes safety and soundness across our financial system, which is the Federal Reserve’s core supervisory responsibility,” she said.
The Fed’s announcement said bank regulators should prioritize their attention on material financial risk and “should not become distracted from this priority by devoting excessive attention to processes, procedures, and documentation that do not pose a material risk to a firm’s safety and soundness.” The announcement referred to the change as a “significant shift from past operating practices.”
Chris Gosnell, the chair of the Arkansas Bankers Association and the president and CEO of Farmers Bank & Trust of Magnolia, echoed Bowman’s sentiment, saying regulators would be able to focus on financial performance instead of check-the-box exercises.
“They are trying to cut out some of that fluff and just get down to what is actually affecting the bank,” he said.
Tim Yeager, the Arkansas Bankers Association chair in banking at the University of Arkansas at Fayetteville, is a former economist at the Federal Reserve Bank of St. Louis. Yeager called the Fed’s change “quite an eye-opener.”
But Yeager said some of the guidance was vague and needed more clarification, such as a definition for material financial risk and more details about how to put the new priorities into practice.
Yeager sees benefits in the ability of regulators to direct their resources to the most pressing issues and to tailor their supervision of banks of different sizes and complexities.
But Yeager is also concerned that there could be a “pretty big gap” in how different federal and state regulators approach their jobs. They currently “talk the same language,” but changes to their approaches could alter that. Yeager is also concerned about a provision that says regulators should not discourage or prohibit banks from taking on liquidity from Federal Home Loan Banks.
Susannah Marshall, commissioner of the Arkansas State Bank Department, said the change won’t directly impact her department, which she said works closely with the Fed and other federal regulators. Marshall said there’s been a feeling that some federal bank supervision has focused on processes, procedures and policies rather than straightforwardly focusing on the safety and soundness of the bank.
“As a regulator, I see the Federal Reserve’s new principles document as a positive step in ensuring that examination practices stay focused on traditional financial metrics and risks and reiterates the primary directive of the supervisory process, which is to promote safety and soundness in the banking industry,” Marshall said.
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