The Federal Reserve is weighing tougher rules for midsized banks as it seeks to avoid a repeat of the recent collapse of Silicon Valley Bank that forced government authorities to intervene at the weekend.
The US central bank is reviewing the capital and liquidity requirements it imposes on banks, especially those with between $100bn and $250bn in assets, a person familiar with the matter said on Tuesday. It will also assess the stress tests it carries out annually, which evaluate lenders’ ability to withstand adverse economic and financial scenarios, among a host of other rules.
The review is part of a broader appraisal the Fed announced Monday of how it supervised and regulated Silicon Valley Bank, which imploded last week and sparked alarm of broader contagion. The central bank is among US regulators who are facing questions over whether they missed signs of mounting problems at SVB, with some experts saying the problems were obvious.
To contain the fallout, the Fed, alongside the Treasury department and the Federal Deposit Insurance Corporation unveiled emergency measures after a frenzied weekend that not only guaranteed all deposits for SVB, but also for crypto-focused lender Signature Bank, which authorities took over on Sunday. The Fed also announced a new lending facility for banks, to ensure that lenders could meet all their depositors’ needs.
But regulatory experts argue that SVB’s red flags could have been identified in advance, or even outright avoided, had lawmakers and regulators not eased rules for smaller lenders in recent years.
In 2018 Congress rolled back portions of the Dodd-Frank Act, the biggest deregulatory effort since the 2007-08 financial crisis, to exempt some banks with assets of up to $250bn from the Fed’s toughest supervisory measures, including stress tests as well as capital and liquidity requirements. The Fed in 2019 followed suit and approved lighter regulations for all but the biggest banks.
SVB fell below that threshold, given it had only $212bn in assets by the end of last year.
Similar questions about regulators’ authorities have been raised by some members of Congress. Dozens of Democratic lawmakers on Tuesday rallied behind a bill led in part by progressive senator Elizabeth Warren, which called to repeal the 2018 rollback.
“In 2018, I rang the alarm bell about what would happen if Congress rolled back critical Dodd-Frank protections: banks would load up on risk to boost their profits and collapse, threatening our entire economy — and that is precisely what happened,” Warren said in a statement.
In a statement released on Monday, Michael Barr, the Fed vice-chair for supervision who is leading the review, said: “We need to have humility, and conduct a careful and thorough review of how we supervised and regulated this firm, and what we should learn from this experience.”
Jay Powell, the Fed chair, added: “The events surrounding Silicon Valley Bank demand a thorough, transparent, and swift review by the Federal Reserve.”
The review will be published by May 1. The Wall Street Journal first reported the Fed was considering toughening the rules for midsized banks.