SVB and Signature failures lead to new rules for banks in the US

The US financial department unveiled Tuesday what may be the biggest banking sector reform in years, aimed at resolving underlying issues that led to the collapse of Silicon Valley Bank and other regional banks.

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Federal Reserve Vice Chair for Supervision Michael Barr responded to inquiries during a Senate Banking Committee hearing by saying, "I expect the need to increase capital and liquidity rules" for banks with assets more than $100 billion."

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Martin Gruenberg, the chairman of the Federal Deposit Insurance Corporation, stated in his evidence before the panel that the failures of Signature Bank and Silicon Valley Bank "show the ramifications that banks with assets of $100 billion or more can have for financial stability. More consideration should be given to the prudential regulation of these institutions, especially with regard to capital, liquidity, and interest-rate risk."

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Once formally announced, new regulatory initiatives are expected to encounter unified Republican resistance. Prior to SVB's failure, GOP lawmakers pressed the Fed to hold off on tightening capital requirements that might have restricted banks.

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Republicans have also cited rising inflation as a contributing factor for the failures, which they attribute to the Biden administration's economic stimulus and which compelled historically hefty interest-rate increases.

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Democrats disagreed with that assessment, claiming that regulation easing implemented by the Trump administration was a factor in the current problems facing the financial sector.

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Barr and Gruenberg listed the following steps in their testimony:

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• Several scenarios will be added to the Fed's stress tests of banks in order to find various avenues of contagion.
• For large banks that aren't classified as globally systemically important, the Fed will suggest "a long-term debt requirement" "so that they have a cushion of loss-absorbing resources," Barr said.
• To increase resilience, liquidity rules will also be reviewed.
• On May 1, the FDIC will present prospective solutions for modifying the current $250k deposit insurance coverage cap.
• Gruenberg demanded that the capital requirements for the securities portfolios of banks with assets more than $100 billion receive "serious attention."

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Nellie Liang, the Treasury undersecretary for domestic finance, stated in her testimony before the committee, "We must ensure that our bank regulatory rules and supervision are suitable for the risks and challenges that banks confront today." She expressed excitement about upcoming regulatory initiatives.

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Senator Elizabeth Warren of the Democratic Party specifically questioned the three senior officials about the need for tighter banking regulations after regulators "burned down dozens of safeguards" put in place by the Dodd-Frank Act, which was created in response to the financial crisis of 2007–2009. Everyone who responded said they agreed that such strengthening was necessary.

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The panel's top Republican, Senator Tim Scott, described the failure of SVB as "a textbook tale of incompetence" on the part of the banks' managers. Without a doubt, he continued, "that's where the buck stops."

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Scott added that regulators should have had "warning signs blinking red." The warning indications were as obvious as a bell, he claimed. How on earth can you ask Congress for additional power while maintaining a straight face

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The panel's leader, Ohio Senator Sherrod Brown, also stated that inquiries should start "at the source, with the CEOs" of the now-defunct organizations and accused them of "hubris, entitlement, and greed."

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Earlier this month, Fed Chair Jerome Powell gave Barr the authority to oversee a study into the collapse of SVB, which the Fed oversaw.

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Blame ‘Shifting’

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"We are assessing whether implementation of more strict standards would have encouraged the bank to better manage the risks that contributed to its demise," Barr said in his testimony. “We're also determining whether SVB would have had more capital and liquidity under those rules and whether having that much more of either would have prevented its collapse.”

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There is a "blame-shifting game" on, according to Republican Senator Mike Crapo, to claim that SVB's demise "was a statutory failure."

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He challenged Barr on whether a law passed in 2018 that relaxed parts of the Dodd-Frank banking regulations had stopped the Fed from taking into account the risks being run by SVB. According to Barr, the Fed does have "considerable discretion" under that legislation.

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The three officials who testified before the panel all repeated their belief that the American financial sector is sound overall. Liang echoed Treasury Secretary Janet Yellen's comments from last week, in which she said that authorities were prepared to take the same exceptional actions that had been used to compensate uninsured depositors following the previous bank failures.

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Covid vs Cholera

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One of the hearing's more heated exchanges came when Republican Senator John Kennedy of Louisiana focused on the Fed's 2022 stress testing not having a scenario for an increase in interest rates.

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He jokingly said that it was similar to someone going in for a Covid test but instead being examined for cholera. "You stress-tested in 2022 for the incorrect thing," he said.

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Barr retorted that he was unfamiliar with the variations among these assessments but emphasized that SVB had been alerted to concerns by supervisors regarding its interest-rate risk profile.