Bank Regulators Testify on Financial Stability Risk

In testimony before the Senate Banking Committee, heads of prudential regulatory agencies described current challenges facing the banking industry and risks to financial stability.

At the hearing:

Federal Reserve Board ("FRB") Vice Chair for Supervision Michael Barr attributed recent bank failures to excessive interest rate risk and an over-reliance on uninsured deposits. He stated that the challenges of the banking sector overall include liquidity risk management and potential credit deterioration, particularly in commercial real estate and consumer sectors. Mr. Barr said that regulators are conducting targeted reviews and focused training in order to manage interest rate and liquidity risks. He stated that the FRB has implemented a "novel bank supervision program" to oversee banks engaged in nontraditional financial technology-related activities. He also pointed to a long-term debt proposal intended to expand resolution planning requirements to large banks.

FDIC Chair Martin J. Gruenberg said that while the banking industry remains "resilient," lower net interest margins, higher funding pressures and the impact of rising market interest rates on asset values raise concern. He said the decline in deposits due to depositors seeking higher yields has led to increased funding costs that impact smaller and mid-sized banks. To address these concerns, Mr. Gruenberg said the FDIC has taken regulatory measures to facilitate the readiness of insured depository institutions in the event of their failure, amend examiner guidance on uninsured deposit concentrations and implement capital requirements aligned with international Basel III standards on large banking organizations.

National Credit Union Administration (NCUA) Chair Todd Harper identified challenges facing the credit union system, including financial strains on credit union balance sheets, an economic slowdown and increased interest rate and liquidity risks. He noted a slight rise in loan delinquency rates and significant funding costs for credit unions in a rising interest rate environment. He said the prevalence of hybrid work environments increased pressure on commercial real estate lending. He said that closer monitoring of these issues is necessary.

OCC Acting Comptroller Michael Hsu called for "vigilant" risk management of banks with high levels of unrealized losses, uninsured deposits or significant commercial real estate exposure. Mr. Hsu underscored the importance of ensuring fair access to banking services for low- and moderate-income neighborhoods, highlighting the risks associated with overdraft protection programs. Additionally, Mr. Hsu highlighted the importance of effective third-party risk management.