President Biden is asking federal banking regulators to tighten some of the rules loosened at the end of last decade for regional banks, forcing institutions the size of the failed Silicon Valley Bank to hold more liquid assets while undergoing more frequent stress tests.
The steps outlined by the White House Thursday don't require new legislation and can be imposed by regulators that currently oversee the nation’s banks, including the Federal Reserve. The Fed is currently reviewing what changes it can make on its own; its bank regulation chief, Michael Barr, told lawmakers Tuesday he does see a "need" for stronger liquidity and capital requirements.
One Republican lawmaker said the Fed already has the power to hold banks like Silicon Valley Bank accountable and it failed to do so. “Instead of giving more authority to regulators who were asleep at the wheel before these bank failures, we should hold them accountable for their inability to utilize their existing supervisory tools,” said Patrick McHenry, chair of the House Financial Services Committee.
The oversight of regional banks was first loosened in 2018 during the Trump administration with a bipartisan bill that re-defined which banks were deemed "systemically important" to those holding at least $250 billion in assets instead of $50 billion, undoing some of the strictest requirements imposed by Congress following the 2008 financial crisis.
That legislation also gave the Fed the power to tailor those rules, which it did along with other regulators in 2019. Current Fed Chair Jerome Powell was in charge of the Fed at the time. Some federal officials, including current Federal Deposit Insurance Corporation Chair Martin Gruenberg, objected to the revisions.
One key 2019 measure now receiving a lot of attention was the Fed’s decision to exempt banks with $100-$250 billion in assets from maintaining a standardized “liquidity coverage ratio.” The ratio is designed to show whether a lender has enough high-quality liquid assets to survive a crisis. A lack of liquidity turned out to be a major problem for Silicon Valley Bank as deposits left the bank and the value of its assets declined as interest rates rose. The $209 billion institution was seized by regulators on March 10.
The White House said Thursday that bank regulators "are encouraged" to reinstate liquidity requirements for banks with between $100-$250 billion in assets and use "rigorous liquidity stress tests that factor in the risks of faster withdrawals in an always-on online environment." Silicon Valley Bank lost $42 billion in one day as many depositors withdrew funds using online platforms.
The Biden administration also asked regulators to require that banks of this size undergo a comprehensive stress test each year, instead of every other year, and reduce a stress test transition period currently in place for banks that cross over the $100 billion threshold. Regulators allowed Silicon Valley Bank to avoid a supervisory stress test for three years after it cleared the $100 billion mark. And when it failed on March 10, the bank had yet to undergo any such test.
Another change the administration highlighted Thursday was for regulators to consider "strong capital requirements" for banks "at an appropriate time after a considerable transition period."
It was not specific on what those levels should look like for banks of various sizes. Capital is what allows a bank to absorb losses on its assets. Silicon Valley Bank was hobbled by large "unrealized" bond losses that technically exceeded the capital available to absorb those losses. Rules currently in place allow a bank of that size to keep those losses out of their regulatory capital ratios.
Other changes called for Thursday by the White House included a call for bank holding companies between $100-$250 billion in assets to supply resolution plans showing how they could be wound down in the event of a failure. Bank holding companies of that size were exempted from such a requirement as part of the rules set in 2019.
The administration also argued that smaller community banks should not have to pay for the failures of Silicon Valley Bank or New York’s Signature Bank, which also was seized this month, in the form of a new assessment from the FDIC that would bolster the regulator’s Deposit Insurance Fund. The FDIC has pledged to pay for all depositors at both failed banks via this fund.
A White House official said Thursday "it's important that they not be subjected to this special assessment. It's also the case that they were not to blame for the actions that resulted in the interventions that the administration had to take."
Gruenberg, the FDIC chair, told a House committee Wednesday that he does have "discretion" on that assessment and would have more to say on the subject in May. "We're going to be keenly sensitive to the impact on community banks."
Another administration official, Treasury Secretary Janet Yellen, also called out the regulatory changes made last decade during the Trump administration.
"Regulatory requirements have been loosened in recent years," she said in a speech Thursday. "I believe it is appropriate to assess the impact of these deregulatory decisions and take any necessary actions in response."