Banking and Finance Law Daily Wrap Up, BANKING OPERATIONS—Fed’s Bowman talks mutual and community banks at business event, (Jan 31, 2025)

By Jonathan Anderson

Bowman discussed the challenges facing mutual banks with raising capital and managing the dividend process, among other topics.

On Jan. 31, 2025, Federal Reserve Board Governor Michelle W. Bowman spoke virtually at the New England CEO Summit in Portsmouth, New Hampshire. Bowman shared her perspective on mutual and community banks, according to her prepared remarks. She discussed two unique issues facing mutual banks: challenges with raising capital and procedural hurdles in managing the dividend process. Bowman also addressed the use of “tailoring” in the regulatory framework, called for more action to combat fraud, and restated her concerns that banking agencies’ climate-related financial risk guidance pushes the boundaries of appropriate regulatory responsibilities.

Mutual bank issues. Bowman discussed two issues facing mutual banks uniquely. First, she said many mutual banks face difficulty raising additional capital, which is exacerbated by an ownership structure that typically requires heavy reliance on retained earnings. Bowman said it would be helpful to provide regulatory flexibility to mutuals if a capital raise is needed. Mutual capital certificates may be a preferable option for mutual banks and could provide an additional way to raise capital without disrupting their mutual structure. However, Bowman said it is unclear whether these instruments qualify as regulatory capital. She said the banking agencies should be receptive to mutual capital certificates to ensure that mutual banks can raise capital and maintain their depositor-owned structure.

Second, Bowman discussed the annual requirement to receive regulatory approval for a mutual holding company’s waiver of a dividend issued by its subsidiary bank. Bowman said the prior approval requirement is complex and imposes significant costs, which reduces the investment that mutual banks can make in their communities. Bowman said the Board should consider whether the process is effective and efficient.

Tailoring. Next, Bowman addressed the use of “tailoring” in the regulatory framework—the calibrating of requirements and expectations imposed on a firm based on its size, business model, risk profile, and complexity. Bowman said this framework could be more effective in balancing the mandate to promote safety and soundness with the need to have a banking system that promotes economic growth. Bowman argued that expansion of the regulatory framework is not cost free and can threaten a bank’s viability. Bowman also touched on supervisory guidance, which she said is particularly important for community banks.

Fraud. The incidence of fraud, especially check fraud, has risen substantially in the past few years. Bowman said efforts by regulators to address fraud have been slow to advance and appear to have done little to solve the underlying root causes of the uptick. She added that there is a need for a joint and coordinated solution.

Climate-related financial risk. Bowman restated her concerns that banking agencies’ climate-related financial risk guidance pushes the boundaries of appropriate regulatory responsibilities. Bowman argued that banking regulators should not dictate credit allocation decisions, and that bank regulatory policy should be used to address the needs of the unbanked and expand the availability of banking services. She further said that bank regulatory policy should not be used to limit or exclude access to banking services for legitimate customers and businesses in a way that is meant to further unrelated policy goals. Bowman discussed guidance on climate-related financial risk to underscore her concerns about what she described as the cumulative regulatory burden on financial institutions, especially community banks.

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