Tighter Regulation Coming for Regional Banks?

Regional banks may be faced with some of the biggest regulatory changes since the global financial crisis, according to testimony before the Senate Banking Committee this week. In their remarks, Federal Reserve Vice Chair for Supervision Michael Barr and FDIC Chairman Martin Gruenberg zeroed in on regional banks that do not meet the current $250 billion threshold to be considered “systemically important.”  

The failures of Silicon Valley Bank and Signature Bank of New York “demonstrate the implications that banks with assets over $100 billion can have for financial stability,” Gruenberg said. “The prudential regulation of these institutions merits serious attention, particularly for capital, liquidity, and interest rate risk.” 

What kind of serious attention? Barr and Gruenberg outlined possible approaches, from enhanced stress tests and liquidity standards—including measures to identify and address vulnerability to potential contagion—to long-term debt and capital requirements.  

The ideas are among a list of potential regulatory responses to the recent bank failures and runs. At the same hearing, there was news the FDIC will propose possible changes to deposit-insurance coverage in May. (Last week, President Biden said increasing the current $250,000 limit was on the table). 

Such a move—and any other legislation to tighten bank regulations—would be hotly debated in a deeply divided Congress. But one potential response appears to have bipartisan support: penalizing some executives of failed banks. Roll Call reports on various efforts to expand the ability to “claw back” bonuses and stock sale proceeds in the event of a bank failure.  

“As far as clawbacks, there are provisions under law that apply to other sectors of the world of finance that perhaps should be applied here. We're going to take a look at that,” House Financial Services Committee Chairman Patrick T. McHenry, R-N.C., said.  

UPDATE: On Thursday, March 30, President Biden formally called on regulators to toughen oversight of mid-sized banks, adding that the proposed actions would not require the approval of Congress.