Silicon Valley demise shows need for more supervision of banks over $100B – Barr

In the Federal Reserve's report on the supervision and regulation of the failed Silicon Valley Bank, the agency provided an outline for how it plans to step up supervision for regional banks in the future.

"Our experience following [Silicon Valley Bank's] failure demonstrated that it is appropriate to have stronger standards apply to a broader set of firms," Fed Vice Chair for Supervision Michael Barr said in the April 28 memo. "We plan to revisit the tailoring framework, including to reevaluate a range of rules for banks with $100 billion or more in assets."

Specifically, regulators will evaluate supervision and regulation of interest rate risk management and liquidity risk, including uninsured deposits, he wrote.

"While interest rate risk is a core risk of banking that is not new to banks or supervisors, [Silicon Valley Bank] did not appropriately manage its interest rate risk, and supervisors did not force the bank to fix these issues quickly enough," Barr said in the release.

In terms of liquidity risk, the Fed will reevaluate how it considers the risks associated with uninsured deposits and the treatment of held-to-maturity securities in standardized liquidity rules.

The Fed will also evaluate improving its capital requirements, including requiring more companies to include unrealized gains or losses on their available for sale securities in capital ratios "so that a firm's capital requirements are better aligned with its financial positions and risk," Barr said.

He also said the Fed will revisit its approach to stress testing, which currently has less coverage and timeliness than it used to for some companies because of tailoring. The Fed will also consider tougher oversight of bank manager incentives.

Barr also noted that Silicon Valley Bank's fast growth yet slow transition to tighter standards contributed to its demise, and the agency will be reevaluating the "speed, force and agility" of its supervision for growing banks.

"Within our supervisory structure, we should introduce more continuity between the portfolios, so that as a bank grows in size and changes its supervisory portfolio, the bank will be ready to comply with heightened regulatory and supervisory standards more quickly, rather than providing a long transition to comply with those heightened standards," Barr said.

The agency will also be attentive to "risks" such as rapid growth and concentrated business models in its supervisory efforts going forward, he said.

However, such rule changes will not take effect "for several years" because of the rulemaking process, including time for public comments, and a phase-in period, Barr said.