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Opinion
Paul J. Davies
THE FED CAN STOP THE NEXT SVB WITHOUT NEW RULES
The US central bank needs to use its existing powers to increase supervision of
fast-growing banks.
The Federal Reserve should have paid more attention to Silicon Valley Bank and
Signature Bank.
Photographer: Samuel Corum/Bloomberg
By
Paul J. Davies
+Follow
March 14, 2023 at 12:08 PM GMT
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Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance.
Previously, he was a reporter for the Wall Street Journal and the Financial
Times. @PaulJDavies
+ Get alerts forPaul J. Davies
It’s clear that regulators missed something at Silicon Valley Bank before its
collapse — along with its investors, depositors and others. To prevent similar
bank failures, President Joseph Biden has already pledged to push Congress and
the Federal Reserve to strengthen banking rules. But in fact, the rules already
in place could have been used better and more actively.
The obvious thing Congress could do is reverse the 2018 legislation that raised
the balance-sheet size threshold where tougher rules kick in for banks that pose
a systemic threat. Had this limit not been increased, both SVB and Signature
Bank, closed by New York regulators over the weekend, would have been subject to
mandatory stress testing and rules designed to help banks survive sudden deposit
outflows.
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The US essentially created a two-tier system where medium-sized banks operated
under less onerous restrictions than their larger peers. In Europe, lenders must
meet the same standards regardless of size, so the region just doesn’t have the
same Achilles heel of weaker oversight for a big chunk of its financial system.
SVB was the 16th-biggest bank in the US — hardly a minnow. Mid-sized regional
banks, including SVB itself, mounted a major lobbying effort in the US to get
this threshold lifted, arguing that the costs involved were far too high to bear
for banks that claimed to be small and simple.
But both of the failed US firms could have been forced by regulators to better
manage their liquidity and asset risks. The legislative change gave the Fed
discretion over whether banks the size of Signature and SVB should be held to
the tougher standards of systemically important banks. The fact that systemic
risks were invoked to justify the weekend support package proves that SVB at
least should have been more tightly governed.
That trigger point for systemically important banks was lifted to $250 billion
from $50 billion in the 2018 Economic Growth, Regulatory Relief, and Consumer
Protection Act, which was Republican sponsored but got wide bipartisan support.
The legislation also said the Fed was free to decide for itself whether banks
with assets of $100 billion or more should be treated in the same way as the
larger institutions.
SVB passed that lower threshold during 2019, while Signature Bank cleared it
during 2020. The Fed could have demanded that both banks perform liquidity
stress tests and meet liquidity coverage ratio rules. This would have made the
risks of deposit flight and losses from selling assets much more apparent to
both managements and supervisors. That might have changed how they operated
— and prevented their failures.
US regulators take a very light touch approach to smaller institutions and the
impetus is on those banks to pay attention to the risks they run, Michael Barr,
vice-chair for supervision at the Fed, told the Peterson Institute for
International Economics last week. He called this an appropriate framework.
Barr is now going to lead a review of the Fed’s oversight of SVB. Dennis
Kelleher, chief executive officer of Better Markets, a lobby group, said
regardless of the threshold debate, the failures of supervision by the Fed were
so glaring that there should be an independent review of its actions. The
primary blame lies with the executives of the banks, Kelleher said. “But a major
contributor to what happened here is a failure of the supervisors, who are on
the ground to make sure that a bank is operated in a safe and sound manner and
doesn’t threaten the financial system,” he added.
Barr is already set to toughen banking rules when the Fed releases its final
implementation of the global Basel banking standards, expected some time after
May. He is likely to beef up capital requirements related to big investment
banks’ trading risks and operational risks, while potentially helping them out
with an easing of leverage ratio rules and the extra capital charges laid on the
largest global firms.
What he should also do is look again at how and when the Fed uses its discretion
to get more involved for lenders with $100 billion to $250 billion in assets.
Some might be very dull and sensibly run institutions that have safely operated
within that range for years. Others will be rapidly growing institutions
already approaching the systemically important level – SVB had $211 billion in
assets at the end of 2022, triple its size at the end of 2019.
Democrats including Elizabeth Warren and Bernie Sanders have already called for
the threshold to be reduced back to $50 billion, but that would require
legislation by a fractious Congress, which seems a big ask right now.
The reality is that Barr can formally tighten up supervision and regulation of
smaller banks as he finalizes US implementation of the Basel rules. The Fed has
questions to answer about why it wasn’t more involved with SVB — but it doesn’t
need to rely on Congress to get a grip on similar risks elsewhere in US banking.
More From Bloomberg Opinion:
* SVB’s Demise Shows UK Pension Funds Weren't the Only Cockroach: Marcus
Ashworth
* SVB Collapse Shows Fickleness of Crypto Money: Andy Mukherjee
* SVB and Silvergate Have Echoes in Texas Bank Crisis: Paul J. Davies
Want more from Bloomberg Opinion? Terminal readers, head to OPIN <GO>. Web
readers, click here.
(Adds lobbying efforts of smaller banks in third paragraph.)
This column does not necessarily reflect the opinion of the editorial board or
Bloomberg LP and its owners.
To contact the author of this story:
Paul J. Davies at pdavies52@bloomberg.net
To contact the editor responsible for this story:
Mark Gilbert at magilbert@bloomberg.net
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