Here’s the Fed’s Plan for Tighter Bank Oversight After SVB’s Failure

Bloomberg

Published Apr 28, 2023 14:54

(Bloomberg) -- The Federal Reserve will undertake an expansive review of US bank rules in the wake of Silicon Valley Bank’s failure, a top official said Friday following a detailed report on the bank’s collapse.

Michael Barr, the Fed vice chair for supervision, outlined a slew of potential changes to how the Fed oversees financial institutions, from capital and liquidity requirements to annual stress testing. The changes would not require legislative approval, a senior Fed official told reporters Friday, but would likely take several years to complete.

Read more: Fed Seeks Broad Changes to Bank Rules in Aftermath of SVB

In a letter accompanying the SVB report, Barr said the Fed should evaluate regulation and supervision in several key areas:

  • Interest-rate risk, an area that SVB failed to manage “appropriately” and the Fed failed to push hard enough
  • Liquidity risk, including risks from uninsured deposits and the treatment of held-to-maturity securities
  • Considering applying standardized liquidity requirements to a broader set of firms
  • Capital requirements, including broadening the group of firms that must take into account unrealized gains or losses on available-for-sale securities
  • Incentive compensation standards that better encourage bank managers to mind risks
  • Stress-testing requirements, which the Fed eased in 2019 for mid-size banks like SVB

Barr also recommended changes to how the Fed supervises banks on the ground, including:

  • Paying closer attention to particular risks posed by firms with rapid growth or other special factors, such as concentration, regardless of asset size
  • Requiring, in individual cases, additional capital or liquidity for firms with inadequate capital planning, liquidity risk management or governance and controls. For example: “Limits on capital distributions or incentive compensation could be appropriate and effective in some cases”
  • Developing a culture that “empowers supervisors,” after staff members failed to act quickly or forcefully on SVB
  • Encouraging supervisors to think through potential “tail events with severe consequences”

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