Fed’s SVB review points to tougher bank regulation

With a fresh bank failure already on their hands at First Republic, the U.S. banking regulators’ reviews of the year’s earlier bank implosions signal tighter regulation is likely on the way, says Moody’s Investors Service in a new report.

Last week, the U.S. Federal Reserve Board released its review of the demise of Silicon Valley Bank (SVB), while the Federal Deposit Insurance Corp. (FDIC) published a review of Signature Bank’s failure and the U.S. General Accountability Office (GAO) issued a review of both collapses.

“Based on the Fed’s review, we expect proposed changes in prudential regulation,” the rating agency said, adding that the expected reforms will affect more than just regional banks.

The Fed’s review calls for measures to strengthen its “supervisory and regulatory framework with the goal of improving the speed, force, and agility of supervision and strengthening banks’ resilience,” Moody’s said.

It also signals plans to make banks with $100 billion or more in assets subject to “more stringent prudential standards.”

“The review notes the need to evaluate the regulation and supervision of interest rate risk as well as the treatment of held-to-maturity securities in liquidity rules, such as the liquidity coverage ratio,” the rating agency said.

“Additionally it recommends including unrealized losses on available for sale securities into the regulatory capital ratios for a broader set of U.S. banks than just the eight U.S. global systemically important banks and Northern Trust,” Moody’s noted.

The Fed’s review also touched on broader issues the bank’s failure revealed, Moody’s said, including how social media, concentrated depositor bases and technology may have “fundamentally changed” how quickly deposit runs can happen.

It also highlighted that contagion risks can occur even if a bank isn’t very large or highly connected to other financial firms.

“The review also emphasized why strong bank capital matters,” it said. While capital requirements were raised in the wake of the financial crisis, the Fed’s review noted that there was also a move to loosen supervision and regulation on smaller banks on the basis that they posed less systemic risk, Moody’s said.

“Strengthening capital, liquidity, and regulatory oversight as the Fed’s review proposes would be credit positive for U.S. banks and financial stability,” the rating agency said, adding that stronger regulation “would likely help address weaker capital, interest rate risk and funding risk at some U.S. banks.”

The FDIC’s review found that Signature Bank’s failure was primarily driven by contagion from SVB’s fall, along with its own large reliance on uninsured deposits, rapid growth and poor risk management, Moody’s noted.

That review doesn’t call for specific reforms to prudential regulation, highlighting improvements in supervision instead, Moody’s said. The GAO review also doesn’t signal recommended changes to capital rules, it added.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.