Martin Gruenberg, the head of the Federal Deposit Insurance Corporation (FDIC), has raised the call for heightened vigilance over major regional banks in light of the recent failures of several banks, including Silicon Valley Bank. Chairman Gruenberg emphasized the need for enhanced regulations and more stringent supervision for these large regional financial institutions.
Gruenberg calls for more bank oversight
Highlighting instances like the collapses of Silicon Valley Bank and Signature Bank of New York, along with the necessity of federal intervention to support uninsured depositors in those establishments, Gruenberg underscored the evident risks that sizable regional banks could introduce to the overall financial system. During a speech at the Brookings Institution, he conveyed that the strain observed within regional banking strongly advocates for proactive measures by federal banking regulatory bodies to tackle the inherent vulnerabilities that facilitated the downfall of these entities.
Proposing a strategy to bolster the financial positions of large regional banks, Gruenberg suggested implementing a guideline mandating that institutions holding assets exceeding $100 billion should secure a higher proportion of their funding through long-term debt. He disclosed that the FDIC, Federal Reserve, and Office of the Comptroller of the Currency are formulating a rule proposal in alignment with this notion. This move aligns with a recent recommendation by Fed Vice Chairman for Supervision, Michael Barr.
Additionally, the regulatory landscape is evolving to include a requirement wherein the impact of unrealized losses within banks’ securities portfolios would dictate the extent of capital a bank must maintain.
FDCI intends to introduce new rules for regional banks
Gruenberg further highlighted that the downfall of Silicon Valley Bank resulted from a loss of market trust, stemming from the bank’s sale of assets at a substantial loss. That raised concerns about the bank’s capital sufficiency. Gruenberg contended that if Silicon Valley Bank had been obligated to hold capital against the unrealized losses on its available-for-sale securities, the bank might have prevented the erosion of market confidence and the subsequent liquidity crisis.
Furthermore, Gruenberg revealed that the FDIC intends to propose a comprehensive rule modification. That would reshape the current requirement for banks with assets exceeding $50 billion to periodically submit plans that outline federal agency procedures in case of a bank failure. These changes are drawn from the lessons learned from experiences with SVB and First Republic Bank. The potential adjustments could necessitate banks to maintain up-to-date operational data, detailed profiles of key personnel, retention strategies, and critical third-party service information.
Gruenberg emphasized the need for heightened vigilance by FDIC bank examiners overseeing institutions reliant on a significant portion of uninsured deposits for funding, similar to SVB and the First Republic. He proposed that the FDIC introduce specific guidelines for examiners to exercise increased caution when overseeing banks with uninsured deposits surpassing a certain threshold. Additionally, banks could be required to provide deposit information more frequently and in greater detail to FDIC. Gruenberg concluded that the events earlier in the year underscored the importance of more proactive supervision for large regional banks.
Despite a notable recovery in regional bank stocks post the spring failures, the FactSet data indicates that the SPDR S&P Regional Banking ETF remains down by more than 30% over the past year.
