WHAT TO EXPECT FROM WASHINGTON IN A POST SVB WORLD

The most recent bank failures and the subsequent fallout will continue to dominate banking policy debates for months or years to come. As these debates turn into new legislation and regulation, it is essential the OBL and all bankers work to ensure our voice is heard. The issues and proposals currently being debated could have a lasting impact for generations to come and would drastically change the way banks serve their customers and communities.

The FDIC and Federal Reserve’s postmortem report on what happened leading up to the bank failures was a stunning admission that Regulators failed to enforce the current regulations on the books. In all three cases, Regulators did not fully appreciate the extent of the vulnerabilities at these institutions, and once they did, they failed to take sufficient steps to ensure the problems were rectified. No one is turning a blind eye to the responsibility of management; however, it is important to note Regulators had all the tools available under current law to avoid the failures. While there was a unique set of circumstances that lead to the collapse of these institutions, the political knee-jerk reaction has been to create new rules to respond to the events. The OBL has broken down the expected response from Washington.

FDIC Insurance

A significant concern in the days following SVB’s collapse was the large number of uninsured deposits and their “run” risk. This led the Regulators to take extraordinary action to insure all deposits and to do a holistic review of the current deposit insurance regime. There have been many ideas thrown around over the last two months but the one idea rising to the top is a targeted increase on deposit insurance for business accounts. Under the proposal, businesses would be able to purchase additional insurance coverage beyond the $250,000 limit, but the FDIC would not require banks to provide this coverage. While there is no detailed proposal as of the writing of this article the OBL believes the excess insurance would be on noninterest bearing transaction accounts. The bank would have the option to offer this increased insurance on an individual customer basis. Any change to the deposit insurance will require an act of Congress and significant bipartisan support.

New Capital and Liquidity Rules

The Federal Reserve’s Vice Chair

for Supervision

Michael Barr has already stated they will unveil a plan for overhauling bank capital and liquidity rules this summer. None of the regulatory agencies have a pending proposal for us to digest, however, based on comments in the press and in Congressional hearings, OBL believes they plan to propose higher capital requirements, and an overhaul of the capital treatment of unrealized losses in the bond portfolio. A proposal like that could be done at the regulatory agency level but would require significant coordination between each to effect the changes they believe would have helped stop the collapse of SVB.

Claw-Back Reform

There is bipartisan support for some sort of claw-back reform legislation in the wake of well reported actions taken by SVB executives. The effort would bolster Bank Regulators’ authority to claw-back pay and bonuses from executives at failed institutions. There has already been five claw-back bills introduced and OBL expects to see some of them combine and gain support from the Senate Banking Committee members over the next few months.

Evan Kleymeyer Senior Vice President of Government and External Relations, Ohio Bankers League ekleymeyer@ohiobankersleague.com