A year after a series of bank runs threatened the financial system, government officials are preparing to unveil a regulatory response aimed at preventing future collapses.
After months of floating solutions at conferences and quiet conversations with bank executives, the Federal Reserve and other regulators could unveil new rules this spring. At least some policymakers hope to release their proposal before a regulatory focused conference in June, according to a person familiar with the plans.
The interagency crackdown would add to another round of proposed and potentially costly regulations that have caused tensions between big banks and their regulators. Taken together, the proposed rules could further anger the industry.
The goal of the new policies would be to avoid the kind of crushing problems and bank runs that toppled Silicon Valley Bank and a string of other regional lenders last spring. The expected adjustments focus on liquidity, or a bank’s ability to act quickly in turmoil, in direct response to problems that became evident during the 2023 crisis.
The banking industry has been particularly vocal in criticizing already proposed rules known as “Basel III Endgame,” the U.S. version of an international agreement that would eventually force big banks to hold more cash-like assets called capital. Banking lobbies financed a major advertising campaign arguing it would hurt families, homebuyers and small businesses by affecting lending.
Last week, Jamie Dimon, chief executive of JPMorgan Chase, the nation’s largest bank, told clients in a private meeting in Miami Beach that, according to a recording heard by The New York Times, “nothing” regulators had done since last year. had resolved the problems that led to mid-sized bank failures in 2023. Mr. Dimon complained that Basel’s capital proposal targeted larger institutions that were not at the heart of the collapse last spring.
Last year’s tumult came when depositors at regional banks, spooked by losses on bank balance sheets, began to fear the institutions would collapse and quickly withdrew their deposits. These runs were linked to problems with bank liquidity – a company’s ability to quickly access money in a panic – and were concentrated among big banks, but not huge.
Since the new proposal is likely to tackle these issues head-on, it could be more difficult for banks to loudly oppose it.
It will likely be “a response to what happened last year,” said Ian Katz, managing director at Capital Alpha Partners. “It makes it a little more difficult for banks to react so vehemently.”
While details aren’t final, the new proposal will likely include at least three provisions, according to people who have spoken with regulators about what’s in the works. The rules are expected to be proposed by the Fed, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.
First, the new proposal would incentivize, or even force, banks to put themselves in a position to borrow through the Fed’s short-term financing option, called the discount window. The tool is supposed to allow banks to access financing during difficult times, but companies have long been reluctant to use it, fearing that its use would signal to investors and depositors that they are in dire straits.
Second, the proposal is likely to treat certain customer deposits differently a key regulation this aims to ensure that banks have enough money to get through a difficult period. Regulators could recognize that some depositors, such as those whose accounts are too large for government insurance or those working in industries like crypto, are more likely to take their money and find themselves in hard times.
Finally, the new rules could concern how banking regulations account for so-called held-to-maturity securities, which are intended to be held and can be difficult to monetize in times of stress without suffering heavy losses.
All these measures would be linked to the saga of the collapse of Silicon Valley Bank last March.
Several intertwined problems led to the bank’s collapse – and the wider chaos that followed.
The California-based bank was facing a financial downturn and needed to liquidate holdings it had initially classified as held to maturity. Silicon Valley Bank was forced to admit that rising interest rates had significantly eroded the value of these securities. When the losses were made public, the bank’s depositors became frightened: many of them had accounts exceeding $250,000 covered by government insurance. Many uninsured depositors requested to withdraw their money in one go.
The bank was not prepared to borrow quickly through the Fed’s discount window and it struggled to access funding quickly enough.
As it became clear that Silicon Valley Bank was going to fail, depositors across the country began withdrawing their money from their own banks. Government officials had to intervene on March 12 to ensure that banks would have reliable sources of funding – and to reassure nervous depositors. Despite all these interventions, other collapses occurred.
Michael Hsu, the acting Comptroller of the Currency, gave a speech in January arguing that “targeted regulatory improvements” were needed in light of last year’s crisis.
And Michael Barr, the Fed’s vice chairman of supervision, said regulators have been forced to take into account that some depositors might be more likely than others to withdraw their money in times of trouble.
“Certain forms of filings, such as those from venture capital firms, high net worth individuals, crypto companies and others, may be more likely to be processed more quickly than previously thought,” he said. he declared in a press release. recent speech.
Banks will likely oppose at least some – potentially costly – provisions.
For example, banks are required to hold high-quality assets that they can monetize to weather tough times. But the rules could force them to recognize, for regulatory purposes, that their held-to-maturity government bonds would not sell for their full value in a pinch.
This would force them to accumulate safer debt, which is generally less profitable for banks.
Bank executives routinely argue that the costs of complying with stricter oversight ultimately pass on to consumers in the form of higher fees and loan rates, and confer advantages on less heavily regulated competitors. like private equity firms.
But the very fact that banks have been so outspoken about capital regulations could leave them less room to complain about the new liquidity rules, said Jeremy Kress, a former Fed banking regulator. and now co-director of the Center at the University of Michigan. on finance, law and politics.
“There is a risk that the boy will cry wolf,” Mr. Kress said. “If they fight all reforms tooth and nail, their critics will start to lose credibility.”
