03/29/23
The Federal Reserve, FDIC, and Treasury testified this week about the collapse of SVB and Signature Bank before the US Senate Banking and House Financial Services committees. The hearing was illustrative on what the regulatory agencies plan to do in the aftermath of the bank closures, as well as where legislators will look to enact public policy changes for our industry. Below the OBL breaks down what we heard and how we are planning to respond.
Upcoming Autopsy- Federal Reserve Vice Chairman for Supervision Michael Barr stated many times during the hearing, the Fed is already underway with an investigation of how this happened. Barr indicated the report will be issued by May 1st and will include any supervisory mistakes that lead to the closures, public policy suggestions for Congress, and an analysis of FDIC insurance and suggested changes.
More Regulation: All three witnesses said that they would support stricter banking rules for mid-sized banks to protect the financial system. Last year Vice Chair Barr announced a holistic review of bank capital. He commented in the hearing recent events have convinced him of the need to move that review faster. He anticipates a need to strengthen capital, liquidity rules, and enhance bank stress testing, but failed to share broader details. One aspect of capital reform that has loomed large in these hearings include the capital treatment associated with unrealized losses in banks’ securities portfolios. Any changes to capital or liquidity standards will need to go through the normal notice and comment rulemaking process and the OBL will comment on those rules to ensure OBL members aren’t punished for the bad decision making of other banks.
Chairman Gruenberg of the FDIC added that he will revise some of the rule changes enacted by his predecessor, former FDIC Chair Jelena McWilliams, most of which were aimed at reducing the regulatory burden on banks.
Deposit Insurance Fund (DIF): Chairman Gruenberg told Congress the collapse of Signature Bank and SVB will likely cost the DIF 2.5B and 20B respectively. When pressed by members of both committee who will pay for that lose, he stated many times it will be repaid by a special assessment on banks as required by law. The law provides the FDIC authority, in implementing the assessment, to consider “the types of entities that benefit from any action taken or assistance provided.” When pushed to expand on which banks would pay he said “the FDIC has broad authority to structure a special assessment, and will target it to banks that benefited from this situation.” The FDIC intends to seek input on any special assessment from all stakeholders through notice-and-comment rulemaking and expects to issue a notice of proposed rulemaking for a special assessment related to the failures of SVB and Signature Bank in May 2023. The OBL will be commenting on the rule that unaffected banks should not be required to pay for the impact to the DIF.
FDIC Insurance Limits: Many questions focused on insurance limits and if they need to be raised as a lesson learned from this crisis. Regulators did not take a stance on this issue and indicated they will have some recommendations for Congress in May. One aspect all of the witnesses agreed on is the risk of banks’ being heavy reliant on uninsured deposits. Chairman Gruenberg said “The significant proportion of uninsured deposit balances exacerbated deposit run vulnerabilities and made both banks susceptible to contagion effects from the quickly evolving financial developments. One clear takeaway from recent events is that heavy reliance on uninsured deposits creates liquidity risks that are extremely difficult to manage, particularly in today’s environment where money can flow out of institutions with incredible speed in response to news amplified through social media channels.” We would expect the regulators to craft new rules about uninsured deposits.
Claw backs: Over 600 pieces of legislation have already been introduced because of the two banks closures. We do not expect the vast majority of them to receive bipartisan support or make any progress legislatively. One topic that is receiving broad bipartisan support is giving regulators more ability to claw back executive pay and bonuses in the event of a bank collapse. Much has been written in the media about some executive’s behavior in the days leading up to SVB’s collapse and we expect legislation to be introduced shortly on this issue.