FDIC Vice Chair Hill Examines SVB Failure, Addresses Potential Reforms

FDIC Vice Chair Travis Hill considered potential policy reforms and statutory and rule changes in the wake of the failure of Silicon Valley Bank ("SVB").

In remarks before a forum held by the Bipartisan Policy Center, Mr. Hill asserted that mismanagement of interest rate risk was "at the core" of SVB’s problem. He said that if banks had been required to hold capital against "unrealized losses on their bond investments," then they may have reduced the chances of SVB’s failure. Mr. Hill identified potential downsides of this measure, such as (i) the likelihood that market prices might "exaggerate fluctuations in value" during periods of stress and (ii) capital requirements being determined by changes in the market value of securities while disregarding changes to the value in loans. Mr. Hill stated that there are "numerous potential ways" to better manage interest rate risk, but emphasized the importance of evaluating potential policy changes and their impact on banks, saying policy changes should consider affects on "the majority of banks in the majority of times."

Mr. Hill said that the failure of SVB reinforced the importance of a bank being able to (i) quickly populate a data room to allow for potential bidders to perform due diligence and (ii) immediately provide a list of key employees for the FDIC’s use to ensure those employees remain in their positions post-failure to facilitate business continuity in a bridge bank scenario. He also questioned whether regional banks should issue long-term debt to account for losses in resolution ahead of depositors.

Mr. Hill distinguished SVB from other banks that carry large unrealized losses in their securities portfolio. He said that the majority of SVB’s deposits were "uninsured, highly concentrated, and . . . remarkably quick to run." He stated that deposit insurance systems were intended to reduce the risk of runs while promoting market discipline. With regard to policy reform following SVB’s failure, Mr. Hill encouraged policymakers to consider the balance between covering depositors while maintaining market discipline.

Characterizing Washington, D.C. as a place where people "tend to criticize and blame first, and learn and understand later... or never," Mr. Hill said there has been an effort to "blame the SVB failure" on the shortcomings of the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2155). He argued that S.2155 had "nothing to do" with SVB’s failure and that the capital standards that SVB was subject to did not test for rapidly rising interest rates. Instead, Mr. Hill urged policy changes based on "evident holes" in banking regulations rather than "just trying to undo policies of the past."

Mr. Hill concluded that financial regulators should be "open to targeted changes," but called for humility around what can be accomplished by agency rules and policies, and cautioned against the "temptation to overcorrect."