WASHINGTON — The Federal Reserve is rethinking a number of its own rules for midsize banks in the wake of the collapse of two lenders, potentially expanding restrictions that currently apply only to Wall Street’s largest firms.
A set of tougher capital and liquidity requirements is under review, as well as steps to bolster annual “stress tests” that assess banks’ ability to weather a hypothetical recession, according to a person familiar with the latest thinking among US regulators.
The rules could target companies with between $100 billion and $250 billion in assets, which are currently evading some of the toughest requirements. There are about two dozen banks within the scope, such as Fifth Third Bancorp and Region Financial Corp.
The Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corporation late Sunday rolled out emergency aid to banks and said depositors would be left full after the failure of the Silicon Valley bank and signature bank. The move was meant to assuage customers worried about the safety of their uninsured deposits after last week’s Silicon Valley bank collapse.
The Fed and other bank regulators have imposed many new rules on banks in response to the recent financial crisis. Lawmakers in 2018 rolled back some of those restrictions by raising a threshold so that the tougher criteria would apply to companies with more than $250 billion in assets. The changes under consideration, permitted by the 2018 law, could have the effect of reversing this shift by significantly lowering that limit.
The Fed was already reviewing a number of its regulations, led by Michael Barr, who is in charge of banking supervision at the central bank. But the banking crisis last weekend caused officials to rethink parts of their review and refocus their efforts on smaller institutions.
Mr. Barr has warned in the past that risks can accumulate across the financial system, including from institutions of diverse sizes and types.
“The rules were not intended to apply only to the largest handful of systemically important companies,” Barr said in a 2018 op-ed in American Banker. “It is the opposite of macroprudential supervision to focus only on the largest handful of financial firms and ignore risks elsewhere in the system.”
Over the coming months, the Fed is expected to propose changes that could require more banks to show unrealized gains and losses on certain securities in their regulatory capital. The move will affect its regulatory capital ratios, which is a key measure of a bank’s strength.
While banks regularly borrow in the short term to lend for longer periods, SVB SIVB -60.41%
Its balance sheet is focused on long-term assets. The bank basically came up with the yield to boost results at the worst possible time, right before the Fed’s rate hike campaign. This resulted in them experiencing unrealized losses, which made them more likely to be withdrawn by clients.
The changes under consideration at the Fed, had they been in place earlier, could have reduced SVB’s reported capital over time. It might have forced it to raise more money sooner or adjust the way it managed its exposures.
Regulators are also preparing to adjust the scope of a scheme to add to regional banks’ financial cushions that could be drawn upon in times of crisis. The October plan put forward by the Fed and the FDIC would have required companies with more than $250 billion to collect long-term debt that could help absorb losses in the event of their bankruptcy. Regulators are now considering proposing the measure to apply to banks below this limit.
At present, the long-term debt requirements only apply to what the Fed considers to be “systemically globally significant” banks.
Write to Andrew Ackerman at [email protected]
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It appeared in the March 15, 2023, print edition as “Federal Reserve to Consider Tougher Rules for Mid-Size Lenders”.
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