CRS Considers FDIC and FRB Remedial Actions on SVB/Signature Bank Failures
Commentary by Sebastian Souchet
The Congressional Research Service (“CRS”) reviewed the remedial actions taken by the FDIC in response to the closures of Silicon Valley Bank (“SVB”) and Signature Bank.
In its report, CRS explained that the FDIC did not use the “typical” purchase and assumption method to immediately sell all or parts of a failed bank to a competitor. CRS stated that due to insufficient time to market SVB and Signature Bank for sale before their closings, the FDIC established bridge banks to continue banking operations until a resolution was found. In the case of SVB and Signature Bank, the FDIC invoked a systemic risk exception to "the least-cost resolution requirement," which allows the guarantee of all uninsured deposits up to $250,000. CRS said both banks had large uninsured deposit amounts on their last call reports. The CRS concluded that guaranteeing uninsured deposits helped to stop bank runs from spreading throughout the banking system and ultimately to prevent a broader financial crisis. CRS noted, however, that by invoking the systemic risk exception, the FDIC’s Deposit Insurance Fund was significantly reduced and could require future assessments of banks to help replenish the payments to depositors.
In response to the banks’ closures, the Federal Reserve Board ("FRB") implemented a new Bank Term Funding Program to provide certain banks with loans that have “more favorable terms” than those currently offered through the FRB’s discount window. The Program was designed to offer additional liquidity in order to help banks meet the needs of their depositors.
CRS stated that these remedial actions have “rekindled” an ongoing discussion about which banks are “too big to fail.” CRS added that the FRB plans to review classification of SVB as a Category IV bank subjected to the “least stringent” enhanced prudential regulation requirements.
Commentary
The collapse of SVB and Signature Bank raised at least two prudential regulatory policy issues: (i) the merits of deposit insurance and the deposit insurance cap; and (ii) the degree to which “small” and “mid-size” banks pose systemic risk to the U.S. financial system.
Regarding the deposit insurance cap, recent testimony by FDIC Chair Gruenberg indicates that the FDIC is going to undertake a “comprehensive review” of the U.S. deposit insurance system and will release a report in May 2023 that will “include policy options for consideration related to deposit insurance coverage levels, excess deposit insurance, and the implications for risk-based pricing and deposit insurance fund adequacy.” This development comes in the wake of reports that Treasury Department staff are studying ways in which they might temporarily expand deposit insurance to cover all deposits, including by relying on the Exchange Stabilization Fund (i.e., the same fund backstopping the Federal Reserve’s recent Bank Term Funding Program, and that has backstopped other emergency Federal Reserve lending facilities). While Treasury Secretary Yellen said she is not considering ways to guarantee all bank deposits, it appears that relevant legislators, including Representative Patrick McHenry and Senate Majority Leader Schumer, have not dismissed the idea of an expansion of the deposit insurance cap. In any event, unilateral, regulatory policy actions contemplated by Treasury staff will very likely run up against Section 1105 of the Dodd-Frank Act (12 U.S.C. § 5612), which requires, among other things, the FDIC to receive approval from Congress for any broad expansions of deposit insurance.
Regarding systemic risk, one of the justifications for Congress’s enactment of the 2018 rollback of the Dodd-Frank Act’s enhanced prudential regulation provisions with respect to mid-size banks was that mid-size banks had a lower risk profile, and accordingly did not pose the type of systemic risk as “too big to fail” banks. The CRS report notes that SVB was a Category IV bank “exempt from or subject to the least stringent [enhanced prudential regulation] requirements.” Yet, federal banking regulators’ invocation of the systemic risk exception provides evidence that SVB’s failure might have had “serious adverse effects on economic conditions or financial stability.” New academic scholarship also suggests that “recent declines in bank asset values significantly increased the fragility of the US banking system to uninsured depositors runs,” giving an SVB-type failure systemic implications. Thus, SVB’s collapse raises questions for policymakers and regulators as to (i) the proper scope of what is considered systemic risk, and (ii) how bank regulatory requirements should be calibrated to adapt to the growth of many mid-sized banks. (Ironically, fears about the stability of mid-size and regional banks led to a surge of deposits moving from such banks to those traditionally considered “too big to fail,” potentially concentrating further financial risk in large banks.)
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