FED Announces Multiple Regulatory Updates for Banks

Review of Silicon Valley Bank. The report discusses in detail the management of the bank and the supervisory and regulatory issues surrounding the failure of the bank. The report and documents detail the bank's rapid growth, as well as the challenges faced by the Federal Reserve supervisors in identifying the bank's vulnerabilities and forcing the bank to fix them. At the time of its failure, the bank had 31 unaddressed safe and soundness supervisory warnings—triple the average number of peer banks. The review finds four key takeaways on the causes of the bank's failure: Silicon Valley Bank's board of directors and management failed to manage their risks, Federal Reserve supervisors did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity, supervisors did not take sufficient steps to ensure that Silicon Valley Bank fixed identified vulnerabilities quickly enough, and the Board's tailoring approach in response to the economic growth, regulatory relief, and consumer protection act and a shift in the stance of supervisory policy impeded effective supervision by reducing standards, increasing complexity, and promoting a less assertive supervisory approach.

Review of Signature Bank. The report identifies the causes of Signature Bank’s failure and assesses the FDIC’s supervision of the bank. The report found that the root cause of Signature Bank’s failure was poor management. The Bank’s board of directors and management pursued rapid, unrestrained growth without developing and maintaining adequate risk management practices and controls appropriate for the size, complexity and risk profile of the institution. The Bank’s management did not prioritize good corporate governance practices, did not always heed FDIC examiner concerns, and was not always responsive or timely in addressing FDIC supervisory recommendations. Signature Bank funded its rapid growth through an overreliance on uninsured deposits without implementing fundamental liquidity risk management practices and controls. With regard to FDIC’s supervision of Signature Bank, the report finds that the FDIC conducted a number of targeted reviews and ongoing monitoring, issued supervisory letters and annual roll–up reports of examination, and made a number of supervisory recommendations to address supervisory concerns. In retrospect, FDIC could have escalated supervisory actions sooner, consistent with the Division of Risk Management Supervision’s (RMS) forward–looking supervision concept. The internal review report recommends a number of matters for consideration or further study by the FDIC related to examination guidance, processes, and resources.

Proposed Rule on Systemic Risk Determination. FDIC is seeking comments, until July 21, 2023, on a proposed rule that would impose special assessments to recover the loss to the Deposit Insurance Fund (DIF or Fund) arising from the protection of uninsured depositors in connection with the systemic risk determination announced on March 12, 2023, following the closures of Silicon Valley Bank, Santa Clara, CA, and Signature Bank, New York, NY, as required by the Federal Deposit Insurance Act (FDI Act). The FDIC is proposing to collect the special assessment at an annual rate of approximately 12.5 basis points over eight quarterly assessment periods, which it estimates will result in total revenue of USD 15.8 billion. The FDIC is proposing an effective date of January 01, 2024, with special assessments collected beginning with the first quarterly assessment period of 2024 (that is, January 01, 2024 to March 31, 2024, with an invoice payment date of June 28, 2024).

Overview of Deposit Insurance System. FDIC released a comprehensive overview of the deposit insurance system and options for reform to address financial stability concerns stemming from recent bank failures. The report, options for deposit insurance reform, examines the role of deposit insurance in promoting financial stability and preventing bank runs, as well as policies and tools that may complement changes to deposit insurance coverage. FDIC outlines three options for deposit insurance reform: Limited Coverage, Unlimited Coverage and Targeted Coverage. Of the three options, the FDIC believes targeted coverage best meets the objectives of deposit insurance of financial stability and depositor protection relative to its costs. Following the failures of Silicon Valley Bank and Signature Bank, FDIC Chairman Gruenberg directed the agency to conduct an analysis of the current deposit insurance framework and identify reform options for consideration, as well as additional tools that can be used to maximize the efficiency of the system.

Additional updates from the U.S. Senate Committee on Banking, Housing, and Urban Affairs are as follows:

• Brown published a letter to Treasury Secretary Janet Yellen, urging the Financial Stability Oversight Council (FSOC) and its member agencies to review how the financial system is serving consumers, small businesses, and small banks, and to recommend ways to strengthen the financial system against threats.
• Brown issued a letter to Federal Housing Finance Agency (FHFA) Director Sandra Thompson about Federal Home Loan Bank (FHLBank) System advances made to Silvergate, Silicon Valley Bank, and Signature Bank leading up to the banks’ failures. The letter requests that FHFA include an analysis of the events around these bank failures in the agency’s report on its review of the FHLBank System.
• Scott and Brown issued statements after the FED and FDIC released reports on the Silicon Valley Bank and Signature Bank failures. Scott emphasized that the recent failures of Silicon Valley and Signature Banks were the result of bank mismanagement, supervisory neglect, and the Biden administration’s inflation crisis, which caused the need for rapid interest rate hikes. The Government Accountability Office (GAO), in its report on bank failures, found that in the 5 years prior to 2023, regulators identified concerns with Silicon Valley Bank and Signature Bank, but both banks were slow to mitigate the problems the regulators identified, and regulators did not escalate supervisory actions in time to prevent the failures.
• Scott and Brown issued statements on the failure of First Republic Bank highlighting that First Republic Bank’s risky behavior, unique business model, and management failures led to significant problems. There is a need to make large banks more resilient against failure in order to protect financial stability and ensure competition in the long run.
• Banking Committee Republicans, led by Ranking Member Tim Scott, are demanding answers and seeking records from the FED and the Federal Reserve Bank of San Francisco regarding their supervision of Silicon Valley Bank in the leadup to its failure.
• The U.S. President Biden urges regulators to reverse the weakening of common-sense bank safeguards and supervision during the Trump Administration for large regional banks in order to strengthen the banking system and protect American jobs and small businesses. The President urges the federal banking agencies, in consultation with the Treasury Department, to consider a set of reforms that will reduce the risk of future banking crises, that includes reinstating rules that were rolled back in the previous Administration for banks with assets between USD 100 and USD 250 billion, reduce the transition periods for applying common-sense safeguards to growing banks that are projected to exceed the USD 100 billion threshold, strengthen supervisory tools, including stress testing, to make sure banks can withstand high interest rates and other stresses, expanding long-term debt requirements to a broader range of banks, and ensuring that the costs of replenishing the Deposit Insurance Fund after these recent bank failures are not borne by community banks.

Related Links

• FED on Review of Silicon Valley Bank
• FED on Acquisition of U.S. Subsidiaries of Credit Suisse Group AG
• FDIC on Review of Signature Bank
• FDIC Proposed Rule on Systemic Risk Determination
• Proposed Rule on Systemic Risk Determination
• FDIC on Overview of Deposit Insurance System
• FDIC on Sale of Loan Portfolio of Signature Bank
• FDIC on Liquidation of Securities of Signature and SVB
• FDIC Agreement with First Citizens Bank
• FDIC Agreement with JPMorgan Chase Bank
• Brown on Strengthening Financial Stability
• Brown on Review of Failed Banks' Borrowing from FHLBanks
• Brown Statement on FED and FDIC Reviews
• Scott Statement on FED and FDIC Reviews
• Brown Statement on First Republic
• Scott Statement on First Republic
• Scott Slams Regulators for Supervisory Failures
• Banking Committee Republicans on FED Supervision of SVB
• Statement on Common-Sense Safeguards and Supervision