Sarah Flowers, senior vice president and senior associate general counsel of regulatory affairs at the Bank Policy Institute (BPI), is set to testify before the U.S. House Subcommittee on Financial Institutions and Monetary Policy. Her testimony addresses the drawbacks of imposing uniform regulations on all banks, which do not consider the size and complexity of their business models. Flowers discusses how certain regulatory practices do not effectively enhance the safety and soundness of banks, but instead hinder their capacity to support their communities.
Flowers argues in her written testimony that "excessive regulation is hindering the ability of the banking system to serve its customers efficiently." She suggests that revising regulatory tailoring thresholds to align with economic conditions and focusing on primary financial risks with regulatory due process would help develop robust reforms in the banking regulatory system, thereby avoiding unnecessary costs to economic development.
The testimony refers to the 2018 S. 2155 legislation, which mandates regulators to adapt bank regulations based on an institution's size. This legislation was designed to prevent regional banks from being scrutinized in the same manner as large multinational financial entities. Despite the law, current supervisory practices often result in divergent and sometimes contradictory requirements that challenge the legislative intent.
Flowers recommends aligning regulatory thresholds with economic growth, suggesting that banks should not face increased compliance demands due to economic expansion. She argues for the fair indexing of thresholds with inflation and growth. Additionally, Flowers highlights issues with "unwritten rules" where bank examiners conduct "horizontal reviews" leading to new regulatory requirements for banks, a practice that contradicts the legislative aim of regulatory tailoring.
Furthermore, she proposes improvements to the bank examination ratings framework, emphasizing the need to focus on substantial financial risks rather than subjective assessments. The current "CAMELS" ratings framework, particularly the Management component, is deemed "entirely subjective and fundamentally flawed," lacking in fairness and due process principles, thus inflating regulatory responsibilities and diminishing banks' competitiveness.
The Bank Policy Institute represents a wide array of banks in the United States, producing scholarly research and providing insights on regulatory and monetary policies. It advocates for the financial services sector on matters such as cybersecurity and fraud.
For more details, Flowers' written testimony is available for access.