President Biden Urges Bank Regulators to Adopt Tougher Capital Rules
Commentary by Steven Lofchie
President Joseph R. Biden urged banking regulators to adopt tougher capital rules to prevent the risk of future banking crises following the failure of Signature Bank and Silicon Valley Bank ("SVB").
President Biden requested regulators to reinstate several banking requirements under the Dodd-Frank Act which were previously repealed, including:
- liquidity requirements and "rigorous" liquidity stress tests that account for the risks of faster withdrawals;
- annual stress tests and implementing capital requirements so that banks are able to withstand potential losses posed by banking-related risks;
- bank holding companies in the $100 to $250 billion size range to submit comprehensive resolution plans that describe how they could wind-down without imposing stress on the rest of the banking system; and
- capital requirements for banks to absorb potential losses during stress events, such as the ones caused by SVB and Silicon.
President Biden called on regulators to ensure stronger supervision by (i) shortening the transition periods for applying "common-sense" safeguards to banks projected to exceed the $100 billion threshold, such as stress tests, (ii) using stress tests to determine whether banks can withstand high interest rates, and (iii) using supervisory tools to assess liquidity in the event of an accelerated outflow of concentrated depositors or other liquidity shocks.
President Biden also encouraged regulators to continue the process of "expanding long-term debt requirements to a broader range of banks," and to ensure that community banks not be held responsible for replenishing the Deposit Insurance Fund after SVB's and Signature Bank's failures.
Commentary
Before bemoaning the regulators' powerlessness to spot the problems at SVB and Signature, and adopting yet more laws and regulations, it is important to consider exactly what went wrong.
Was it really the case that the bank regulators did not have the ability, given the existing statutory framework, to detect that the failed banks suffered from significant liquidity mismatches? Likewise, while high interest rates were certainly a material contributing factor to the banks failures, it remains notable that in its annual reports on risks to the financial system, FSOC said almost nothing about inflation and high interest rates, even though it was the risk that was the visual equivalent of the top row on an optometrist's chart.
Perhaps the problem was not statutory authority; perhaps the problem was human misconduct and human error. Determining what went wrong first should be the focus.
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In a joint statement, the U.S. Treasury, the FDIC and the Federal Reserve Board announced that all depositors, both insured and uninsured, of Silicon Valley Bank and Signature Bank, would be made whole for their deposits.