New Oversight and Rules Urged for Large Regional Banks

In light of recent failures in the banking sector, including Silicon Valley Bank (SVB), Federal Deposit Insurance Corp. (FDIC) Chairman Martin Gruenberg has called for stronger oversight and the implementation of new rules for large regional banks.

Speaking at the Brookings Institution on Monday, Gruenberg emphasized the potential risks that large regional banks pose to the financial system. The failures of SVB and Signature Bank of New York, as well as the need for federal regulators to intervene and assist uninsured depositors, have highlighted these risks.

Gruenberg stressed that immediate action is necessary to address the vulnerabilities that led to the failures of these institutions. One proposed strategy is the implementation of a rule which mandates that banks with over $100 billion in assets finance themselves with a larger proportion of long-term debt. This plan is set to be outlined in a forthcoming proposal by the FDIC, Federal Reserve, and Office of the Comptroller of the Currency.

Additionally, regulators are working towards a requirement that unrealized losses in banks' securities portfolios affect the amount of capital that must be maintained by the bank. This change aims to ensure greater transparency and accountability.

Gruenberg specifically cited the failure of Silicon Valley Bank, attributing it to a loss of market confidence after the bank sold off some assets at a significant loss. This raised concerns about the bank's capital adequacy.

Overall, Gruenberg's call for new oversight and rules is driven by the need to mitigate risks and strengthen the stability of large regional banks. Failure to address these vulnerabilities could have detrimental effects on the financial system as a whole.

The Importance of Holding Capital: Lessons from Silicon Valley Bank

Silicon Valley Bank (SVB) could have potentially avoided the loss of market confidence and liquidity run if it had been required to hold capital against unrealized losses on its available-for-sale securities, according to the Federal Deposit Insurance Corporation (FDIC) Chairman, Martin J. Gruenberg.

In light of this experience, the FDIC is planning a comprehensive overhaul of the regulatory requirements for banks with more than $50 billion in assets. These proposed changes would involve the submission of plans that provide detailed guidance to federal agencies in the event of a bank failure.

The new requirements would draw from the FDIC's knowledge gained through the cases of SVB and First Republic Bank. Banks would need to ensure they possess timely information crucial for sustaining their operations, including thorough descriptions of key personnel, retention plans, and critical third-party services.

Furthermore, Gruenberg emphasized the need for increased vigilance from bank examiners in supervising financial institutions that heavily rely on uninsured deposits for funding, similar to SVB and First Republic. To address this concern, the FDIC may develop specific instructions for examiners to carefully oversee banks with uninsured deposits beyond a specified threshold. Additionally, banks may be required to report deposit information more frequently and in greater detail.

Undoubtedly, this year's events have highlighted the importance of proactive supervision for large regional banks. While regional bank stocks have shown signs of recovery, with the exception of the SPDR S&P Regional Banking ETF KRE, which remains down by over 30% in the past year according to FactSet.

By learning from past experiences, implementing stricter regulations, and adopting a forward-looking approach to supervision, the banking industry can strive for increased stability and restore market confidence.