3 May, 2023
Fed, FDIC bank failure reports preview impending regulatory changes
By Zoe Sagalow and Alison Bennett
The US Federal Reserve and Federal Deposit Insurance Corp. laid out a trajectory for how they will proceed with bank regulatory and supervisory changes in recent reports issued on the failures of Silicon Valley Bank and Signature Bank.
In a report about the failure of Silicon Valley Bank issued April 28, the Fed spelled out a regulatory path to include tighter rules on liquidity risk, uninsured deposits, treatment of held-to-maturity securities in standardized liquidity rules and stress testing. Meanwhile, the FDIC, in a report issued the same day on the failure of Signature Bank, said it is likely to consider stronger examinations involving uninsured deposits and liquidity.
Banking industry experts said the reports set out a tougher regulatory road ahead for banks.
"Even more so than before, banks should be ready for examiners to question their business decisions, to put pressure on them in a way that in some cases can make it difficult to innovate or grow their organization," said Matthew Bisanz, a partner in Mayer Brown's Financial Services Regulatory and Enforcement practice, in an interview.
No surprises from the Fed
For the most part, the potential rule changes the Fed laid out in its report came as no surprise.
In the report, Vice Chair for Supervision Michael Barr said the agency plans to reconsider its tailoring framework, including various rules that apply to banks with assets of $100 billion or more. Those rules include capital and liquidity requirements and more rigorous stress tests.
Such changes would be a reversal of 2018 legislation that loosened those rules for regional banks with between $50 billion and $250 billion in assets. However, that legislation preserved the Fed's authority to re-apply those rules to regional banks, and Barr's report on Silicon Valley Bank implied that the agency plans to do just that.
"It wasn't that there were any real surprises, but I just think that the level of certainty specifically around the 2018 changes getting rolled back is very high," said James Stevens, co-leader of Troutman Pepper's financial services group, in an interview.
Barr's road map confirmed market expectations, agreed Piper Sandler analyst R. Scott Siefers.
"His comments begin to codify much of what the market has speculated since the onset of last month's turmoil: a focus on $100B+ banks, potentially higher capital requirements, broader liquidity rules, and (thankfully) multiyear phase-in procedures," Siefers said in a note. "In that sense, his comments help create a more formalized framework for what is likely to be a long road of regulatory response."
The report was
The report's claim that the changes to those rules and other related rulemakings "combined to create a weaker regulatory framework for a firm like SVB Financial Group" is likely to "spark disagreement from many in the banking industry," Katz wrote.
Nonetheless, the report suggests it is "very likely" that the Fed will propose revisions to its standards for larger banks and "accelerate the implementation period for whether the standards apply to a growing institution," Mayer Brown's Bisanz said.
Barr's focus on tightening rules for banks with more than $100 billion in assets was a positive for banks below that threshold, such as Comerica Inc., which had $91.13 billion in assets at March 31, and Zions Bancorp. NA, which had $88.57 billion in assets as of the same date, Jefferies analysts wrote in a note.
Any such rule changes from the Fed "would not be effective for several years," Barr wrote in the report.
"This is certainly preferable to a broader regulatory push for immediate capital actions that could spook investors," Piper Sandler's Siefers wrote. "We view anything that gives banks time to grow their way into new/higher requirements organically as a positive."
FDIC focuses on exam guidance
While the Fed report focused largely on potential rule changes, the FDIC report laid out a recommendation for enhanced supervisory exams, particularly as it relates to uninsured deposits and liquidity.
The report said the agency should consider the need for "enhanced examination guidance" for supervising banks that are overly reliant on uninsured deposit funding or have concentrations in uninsured deposits. It should also consider enhancing its examination guidance for assessing liquidity risk management practices based on the FDIC's experiences supervising Signature Bank.
The FDIC and other agencies are already doing just that, said Troutman Pepper's Stevens.
"Banks are already undergoing increased scrutiny and the expectations of them are higher," Stevens said. "That is the most immediate short-term effect, and it's already in place. No rulemaking or no legislation or notice periods or anything is required for just more scrutiny by the people that have boots on the ground, which is, again, happening."
Specifically, clients undergoing supervisory visitations since the recent bank failures received more of a focus on liquidity, uninsured deposits, deposit concentrations and capital versus losses in banks' investment portfolios, he said.
"All of those things have been sort of ramping up over the past few months, but certainly since these two failures, we've seen it at a hyper level, and if anybody was actually in an exam or if anyone had particular risk points, they are already undergoing [a] much, much higher level of scrutiny than they were, say, six months ago," Stevens said in an interview.
Overall, the reports highlight the agencies' work to avoid any similar situations cropping up in the future.
"In my opinion, the bank regulators, and especially the Fed and the FDIC, are really scrambling right now trying to figure out how to respond, both operationally and whether additional regulations are needed, to prevent future Silicon Valley and First Republic fiascos," said Bert Ely, principal of bank consultancy Ely & Co., in an email.