Treasury Assistant Secretary Steele Highlights Regulatory Principles "Reinforced" by Bank Failures

Treasury Assistant Secretary Graham Steele elaborated on lessons learned and regulatory principles that were "reinforced" following the recent bank failures.

In remarks before the Americans for Financial Reform Education Fund, Mr. Steele reiterated that "inadequate" risk management and supervisory oversight played a role in the respective failures of Silicon Valley Bank ("SVB") and Signature Bank. He described additional areas that played a "vital role" that require review:

• Risk Metrics. Mr. Steele said that no single measure can provide a comprehensive overview of a bank’s potential risks. He said that "the market has now become focused on the unrealized losses in banks’ available-for-sale and held-to-maturity securities as important metrics to assess a bank’s solvency," which "highlights the disconnect between useful measurements of a bank’s health and the calculation of bank capital requirements." He added that had SVB recognized unrealized gains or losses on its available-for-sale securities, its capital may have been reduced by $1.9 billion at the end of 2022 and could have caused the bank to raise capital sooner.

• Regulatory Assumptions. Mr. Steele stated that banking regulations' reliance on "various assumptions" regarding credit risk, liquidity needs and macroeconomic-based indicators are evidence of their "limitation and imprecision." He said that had the "full [liquidity coverage ratio]" been applied to SVB, it would have provided an earlier warning signal of its "risk liquidity profile." He also reiterated FRB Vice Chair Michael Barr’s call for a review of regulators’ assumptions with regard to bank runs for uninsured deposits given the "level and speed" of withdrawals experienced by SVB which went "far beyond the firm’s own assumptions under its internal liquidity stress test."

• Enhanced Prudential Standards ("EPS"). Mr. Steel advocated for a "more timely application" of EPSs to address risks stemming from rapid asset growth. In the case of SVB, he stated that it had "nearly tripl[ed] in size over a two-year span" by the time it became subject to Category IV standards, but under the tailoring rule framework, it would not have undergone its first stress test for several more years. He recommended that regulators consider whether capital requirements under the current framework accurately reflect the risks for each bank size category and in particular for banks that "increase in asset size without exceeding other thresholds contained in the tailoring framework."