WASHINGTON — The Federal Reserve's top regulator told Congress the recent crisis in the banking system will likely result in new capital and liquidity requirements for mid-tier and larger banks.
Fed Vice Chair for Supervision Michael Barr joined Federal Deposit Insurance Corp. Chairman Martin Gruenberg and Treasury Undersecretary for Domestic Finance Nellie Liang for the first in two congressional appearances — this time before the Senate Banking Committee — Tuesday morning.
During the hearing, Sen. Elizabeth Warren, D-Mass., asked regulators if the failures of Silicon Valley Bank and Signature Bank earlier this month would cause them to pursue rule changes to prevent similar collapses.
"We, of course, would need to go through a notice and comment rulemaking in this process," Barr said. "But, I anticipate the need to strengthen capital and liquidity standards for firms over $100 billion."
Gruenberg added that he favors revisiting some of the rule changes enacted by his predecessor, former FDIC Chair Jelena McWilliams, most of which were aimed at reducing the regulatory burden on banks.
"I was a member of the board at that time and voted against those measures," Gruenberg said. "And I certainly think it's appropriate for us to go back and review those actions in light of the recent episode and consider what changes [might be appropriate]."
The regulators' calls for expanding oversight practices and stiffening capital requirements drew the ire of some lawmakers who feel the root causes of the crisis was the management of the individual banks and the inability of supervisors to address them.
"Each of you were asked, 'Would you like to see more powers, more strength?' Every single one of you said yes when you don't actually know if you utilize the tools in your toolbox correctly, or if the people that were under your supervision were supervising appropriately," said Sen. Katie Britt, R-Ala. "I think that's what people hate about Washington. We have a crisis and you come in here without knowing whether or not you did your job. You say you want more. That's not the way this works. You need to be held accountable."
Barr, in particular, took heat from both sides of the aisle over the perceived supervisory failures in overseeing Silicon Valley Bank.
"I feel really frustrated with our regulators," Warren told reporters outside the hearing. "They clearly fell down on the job, and it's pretty tough to admit how wrong they got it and stand up and say they're going to head in a different direction."
Lawmakers seem to have focused on the Fed's relative flexibility in adjusting rules for some large banks, notably those in the $100 billion to $250 billion range, as a more immediate avenue for change to the current banking regulation structure than legislation.
The Fed was given broad discretion over how to treat banks in that tier in the Economic Growth, Regulatory Relief, and Consumer Protection Act, also known as S. 2155, a 2018 law that applied new tailoring requirements to the Dodd-Frank Act of 2010.
While S. 2155 was championed by Republican lawmakers at the time, it won the support of some moderate Democratic lawmakers. Today, some Democratic lawmakers say then-Vice Chairman for Supervision Randal Quarles used the law's flexibility to loosen rules on banks in that size range. It has become a political talking point for both parties, but in the current divided Congress there's little chance that significant legislative changes would pass.
"I don't think this place will repeal 2155 because the banks have too much power and they'll be lobbying against it," Senate Banking Committee Sherrod Brown, D-Ohio, told American Banker in a brief interview. "But we can undo what Quarles used 2155 to do. That's where my efforts are going, working with the regulators."
Sen. Mike Crapo, R-Idaho, the lead sponsor on S. 2155, used his time to refute some of the claims around the legislation, noting that the intent of the law was to "stop a one-size-fits-all system," while still giving broad discretion to the Fed, particularly for banks between $100 billion and $250 billion.
In response to Crapo's questions, Barr acknowledged that the Fed, in 2019, chose to apply less stringent oversight standards to banks in that tier. He also said the accounting treatment of securities losses for banks of that size was not dictated by S. 2155 and that, by current standards, Silicon Valley Bank was deemed well capitalized before its collapse.
Throughout the hearing, Barr said the Fed intends to use the discretion granted under S. 2155 to make changes to rules and regulations for large firms. He cited the central bank's ongoing efforts to enact the final portions of the Basel III international standards as well as an ongoing consideration of resolution requirements for mid-tier banks as areas likely to be shaped by the ongoing crisis. But, he did not commit to any specific course of action.
"We haven't made a definitive conclusion on [specific rule changes], we're undertaking this review of SVB's failure in order to better assess whether it'd be appropriate to change capital rules and liquidity rules for this size firm for firms more generally," Barr said. "We're looking at that right now."
There is still some momentum on the Hill to respond to the banking panic with legislation. Warren said that she's introducing a bipartisan bill that will hold bank executives at institutions like Silicon Valley Bank and Signature Bank "accountable" for their "wild risks." She later told reporters that she plans to introduce that bill within "days." There's a
While the Biden administration has been careful to avoid calling its drastic intervention to guarantee all the uninsured deposits at Silicon Valley Bank and Signature Bank a "bailout," populist anger has begun to build around the payouts to wealthy tech investors and companies who kept large sums in Silicon Valley Bank, in particular. That's been exacerbated by raised eyebrows around a fact that appeared in Gruenberg's written testimony: That the ten largest accounts at Silicon Valley Bank held $13.3 billion, collectively.
Sen. J.D. Vance, R-Ohio, said the fact that Silicon Valley Bank had such a large concentration of deposits exceeding the $250,000 insurable limit was not a coincidence. He said the bank's business model centered on providing financial services to wealthy individuals and venture capital-backed businesses in exchange for them depositing a large portion — if not all — of their funds within the bank.
"Given that was implied in the business model of the bank, I think it's important that we use the term bailout — and I know that some of you don't like that term, but I think it's the only term that applies fairly here," Vance said. "Because we, using excess fees on community banks all across the country, effectively chose to bail out the uninsured depositors in Silicon Valley Bank."
