Regulators Testify on Current Banking Conditions

Bank regulators testified before the House Financial Services Committee on current conditions; they reported resiliency during a period of economic stress.

• OCC Acting Comptroller Michael J. Hsu. Mr. Hsu stated that the OCC monitors supervised banks for sufficient liquidity and capital. Mr. Hsu maintained that the "vast majority" are not experiencing stress in connection with depositors or business customers. Mr. Hsu underscored previous calls against complacency among banks and advocated for strong risk management policies and practices. He highlighted steps to "restore full confidence in the banking system", including (i) empowering supervisors to act in a timely manner and exercise supervisory discretion, (ii) strengthen capital and liquidity requirements for large banks to "reduce risk in light of market conditions," (iii) "carefully consider[ing]" the FDIC’s report recommending expansion of deposit insurance to cover business payment accounts, and (iv) preserving the diversity of the banking system, including the community banking model.
• National Credit Union Administration ("NCUA") Chairman Todd M. Harper. Mr. Harper concluded that the credit union system is well positioned to (i) handle "economic dislocation" in the event of a moderate recession and (ii) address economic uncertainty. Mr. Harper stated that federally insured credit unions and the NCUA Share Insurance Fund have remained stable. He added that, over the past year, total loans, assets, insured shares and deposits have increased but did note a decrease in insured share growth. Mr. Harper urged Congress, to act on (i) H.R. 3958 ("Central Liquidity Facility Enhancement Act") which would help the NCUA address the rise in liquidity risks and (ii) H.R. 7022 ("Strengthening Cybersecurity for the Financial Sector Act") which would restore the NCUA’s third-party vendor examination authority. Mr. Harper also asked that in determining amendments to the federal deposit insurance requirements, Congress maintain "parity" between the Share Insurance Fund and Deposit Insurance Fund.
• FDIC Chairman Martin J. Gruenberg. Mr. Gruenberg stated that the banking industry has shown resiliency following the bank failures citing data that shows the aggregate bank net income was roughly the same in the last quarter of 2022 as in the first quarter of 2023. He added that asset quality metrics are "favorable" and that the banking industry continues to be well capitalized. Mr. Gruenberg highlighted the potential risks of weakening credit quality and profitability which could cause tightening of loan underwriting and slower loan growth. He also projected possible challenges for CRE loan portfolios, as demand for office space remains low and property values continue to decrease. Mr. Gruenberg highlighted FDIC report findings on Signature Bank, including (i) reinforcing the FDIC’s "forward-looking supervision philosophy", (ii) addressing risk-management weaknesses in a timelier manner, (iii) improving examination guidance and (iv) evaluating the escalation process for instances of repeat recommendations from supervisory staff to banks.
• Federal Reserve Board ("FRB") Vice Chair for Supervision Michael S. Barr. Mr. Barr reported on the resiliency in the U.S. banking system while emphasizing that the increasing interest rates are creating: (i) declines in fair values of investment securities, (ii) increases in wholesale borrowings to address the emerging funding needs and (iii) increases in delinquency rates on some loan segments. With regard to the failure of Silicon Valley Bank’s ("SVB") and the FRB’s internal review post-failure, Mr. Barr highlighted (i) the importance of strong levels of bank capital, (ii) the widespread effect of SVB’s distress on the banking system and (iii) the importance of the FRB evaluating supervisory procedures of covered banks’ interest rate risk and liquidity risk management practices.