US Officials Signal New Rules for Banks After SVB, Signature Failures

2/2 © Bloomberg. Nellie Liang, under secretary for domestic finance at the US Treasury, from right, Michael Barr, vice chair for supervision at the US Federal Reserve, and Martin Gruenberg, chairman of theFederal Deposit Insurance Corp., during a Senate Banking, Housing, and Urban Affairs Committee hearing in Washington, DC, US, on Tuesday, March 28, 2023. Congressional committees are poised to start probing the collapse of Silicon Valley Bank and Signature Bank, offering a stage for what's likely to be a partisan clash over the role of financial regulations in the second largest bank failure in US history. 2/2

(Bloomberg) -- Top US financial officials on Tuesday outlined what’s likely to be the biggest regulatory overhaul of the banking sector in years, in an initiative aimed at addressing underlying issues that contributed to the collapse of Silicon Valley Bank and other US regional lenders.

“The failure of SVB illustrates the need to move forward with our work to improve the resilience of the banking system,” Federal Reserve Vice Chair for Supervision Michael Barr said in testimony to a Senate Banking Committee hearing.

Federal Deposit Insurance Corp. Chairman Martin Gruenberg said, in his testimony, that the failures of SVB, as Silicon Valley Bank is known, and Signature Bank (NASDAQ:SBNY) “demonstrate the implications that banks with assets of $100 billion or more can have for financial stability. The prudential regulation of these institutions merits additional attention, particularly with respect to capital, liquidity and interest-rate risk.”

Fresh regulatory proposals, once formally presented, are set to meet concerted Republican opposition. GOP lawmakers had already put pressure on the Fed before SVB’s collapse to avoid any step up in capital rules that could constrain banks.

Republicans have also laid blame for the failures on a backdrop of high inflation — which they say was caused by the Biden administration’s fiscal stimulus — that forced historically aggressive interest-rate hikes. 

Democrats have rebuffed that analysis, saying regulatory loosening under the Trump administration contributed to the current banking-sector woes.

Among the steps outlined by Barr and Gruenberg in their testimony:

• The Fed’s stress tests of banks will be enhanced with multiple scenarios to uncover a variety of channels of contagion.
• The Fed will propose “a long-term debt requirement” for big banks that aren’t designated as global systemically important, “so that they have a cushion of loss-absorbing resources,” Barr said.
• Liquidity rules will also be explored to improve resiliency.
• The FDIC will on May 1 lay out options for potential changes to deposit-insurance coverage, which is now capped at $250,000.
• Gruenberg called for “serious attention” to the capital requirements for the securities portfolios of banks with assets over $100 billion.

“We must ensure that our bank regulatory policies and supervision are appropriate for the risks and challenges that banks face today,” Nellie Liang, the Treasury undersecretary for domestic finance, said in her testimony to the committee. She said she looked forward to forthcoming regulatory proposals.

Republican Response

Senator Tim Scott, the top Republican on the panel, said of the collapse of SVB that “this is a classic tale of negligence” on the part of the banks’ managers. “Without any question that’s where the buck stops,” he added.

Scott also said that “warning signs should have been flashing red” for regulators. “Clear as a bell were the warning signs,” he said. “How can you ask Congress for more authority with a straight face.”

Senator Sherrod Brown, an Ohio Democrat who chairs the panel, also said that questions begin “at the source, with the executives” of the now-failed institutions, and charged them with “hubris, entitlement, greed.”

Fed Chair Jerome Powell earlier this month ordered a review of the collapse of SVB, which it supervised, to be led by Barr. 

“We are evaluating whether application of more stringent standards would have prompted the bank to better manage the risks that led to its failure,” Barr said. “We are also assessing whether SVB would have had higher levels of capital and liquidity under those standards, and whether such higher levels of capital and liquidity would have forestalled” its collapse.

©2023 Bloomberg L.P.