Our Take: financial services regulatory update - March 13, 2023

Current topics - March 13, 2023

Regulators step in and President Biden speaks following bank failures

Three banks have entered voluntary or government-ordered resolution in the last week. First, on March 8th, Silvergate Bank, which focused on serving digital asset customers, announced that it began voluntary liquidation. Then, on March 10th, tech-focused Silicon Valley Bank (SVB) was closed by the California Department of Financial Protection and Innovation, which named the FDIC as receiver. Most recently, on March 12th, the New York Department of Financial Services announced that it had taken possession of Signature Bank and appointed the FDIC as receiver. All three banks faced liquidity challenges due to severe deposit outflows and reduced capacity to generate new liquidity. 

Following these events, the Treasury Department, Fed, and FDIC released a joint statement announcing that all depositors of SVB and Signature Bank will be made whole as they made a systemic risk exception to cover uninsured deposits. They also clarified that no losses associated with the resolution of either bank received by the FDIC would be passed on to taxpayers and any losses to the Deposit Insurance Fund “will be recovered by a special assessment on banks, as required by law.” Simultaneously, the Fed announced the creation of a new Bank Term Funding Program that will offer loans of up to one year to depository institutions pledging Treasuries, agency debt, mortgage-backed securities and other qualifying assets as collateral, which will be valued at par. The FDIC also announced that it has established bridge banks for both Silicon Valley Bank and Signature Bank to allow for certain continued operations. 

On March 13th, President Biden gave a speech stating that the banking system is safe and indicating that he will ask Congress and banking regulators to “strengthen the rules for banks.” In addition, Fed Vice Chair for Supervision (VCS) Michael Barr released a statement that the Fed is conducting a review of the events surrounding SVB’s failure, how the agency supervised and regulated the bank, and lessons learned. The review will be publicly available May 1st. 

Our Take

In response to the first significant series of bank failures since the financial crisis, the Fed, FDIC and Treasury have taken urgent measures designed to promote confidence in the banking system. While these actions may ease concerns about liquidity and the safety of uninsured deposits, it remains to be seen to what extent they will calm depositors and whether further action will be needed to restore confidence as the situation continues to unfold.  

As articulated in President Biden’s call to strengthen bank regulations, the agencies’ support will have a supervisory impact on banks. The most immediate effect will be felt through intensified supervision of banks’ interest rate risk and liquidity risk management practices. Beyond that, it remains highly unlikely for the current divided Congress to pass any significant changes to the 2018 regulatory relief law, but we still expect to see the regulators make adjustments to the regulatory tailoring it prompted, such as increasing liquidity ratios and changing high quality liquid asset (HQLA) criteria. The regulators will also likely increase the frequency of stress testing and liquidity reporting as well as review and potentially reconsider the opt out of Accumulated Other Comprehensive Income (AOCI) from regulatory capital for banks with under $250b in assets¹. In addition, as SVB only filed its first resolution plan last year and Signature Bank had not yet filed one, the FDIC may consider increasing the content and frequency of resolution plans. 

Regardless of changes in regulatory requirements and expectations, banks should be focused on ensuring their deposit strategies, liquidity risk and interest rate risk practices are aligned to market scenarios that may unfold, particularly as the impact of the rate environment puts further pressure on deposits and funding. For more information and recommendations, see our First Take: Recent market events highlight the importance of financial risk management.

1 _{AOCI is made up of unrealised gains and losses on available-for-sale assets that make up banks’ liquidity buffers.}