The news: The Biden administration is calling for tighter banking regulations that can be enacted outside of congressional legislation, per Reuters.
Banking authorities’ power: The administration identified actions banking authorities can take to tighten regulation, especially for midsize banks, without congressional approval.
- Financial agencies have the power to require banks to hold more liquid assets, bolster their capital, complete routine stress tests, and maintain living wills that explain how they can be unwound in the event of a collapse or failure.
- The White House has specifically called on regulators to compel banks with assets between $100 billion and $250 billion to conduct annual stress tests similar to those already done by larger banks, and to create living wills.
- The ability to authorize these actions under existing laws means that no new legislation would need to pass through Congress, which is currently split between political parties.
- The Biden administration called for a shorter grace period for affected banks to comply with these regulations. Per Reuters, the reinstatement of these Trump-era scaled-back regulations would pertain to less than two dozen financial institutions.
Also of note, the administration asked the FDIC to consider various options for making a special assessment to replenish the Deposit Insurance Fund so that community banks wouldn’t have to bear the brunt of it.
Immediate pushback: The call to action quickly met with pushback from Republicans and industry trade groups.
- Rep. Patrick McHenry, chair of the House Financial Services Committee, criticized the Biden administration for turning the banking crisis into a political issue.
- Head of the Bank Policy Institute Greg Baer questioned what happened to the Fed’s promise for a thorough review into the bank collapses, and described the Biden administration’s calls as feeling like “ready, fire, aim.” He also pointed out that tighter regulations would increase costs for these banks, and ultimately their customers.
Is this the solution? Lawmakers and financial regulators extensively discussed gaps in regulation and lax enforcement actions at two congressional hearings this week. All parties agreed that regulatory changes were likely to result from this crisis, but new regulations alone aren’t enough to address its root causes.
- Many, including President Biden, have pointed out that SVB suffered from reactive rather than proactive supervision and poor risk management. The bank’s chief risk officer left in April 2022 and wasn't replaced until December. Biden said that those responsible for the collapse will be held accountable, but preventing weak management can’t be controlled through legislation.
- Many smaller and midsize banks are dealing with weak balance sheets, largely due to the Fed rapidly increasing interest rates to tackle inflation. Though some banks have better balance sheet management practices than others, it’s still tough to manage large bond portfolios effectively when interest rates have soared by nearly 4.5% in less than a year.
- SVB’s collapse occurred basically overnight, as news of the bank’s distress quickly spread across social media channels. Banking officials don’t have the power to regulate how consumers communicate, thus making it tough to prevent a recurrence. But the CFPB has pointed out that regulators do have the ability to identify the risks inherent in new communication methods and can strengthen banking rules to address those risks.
This article originally appeared in Insider Intelligence’s Banking Innovation Briefing—a daily recap of top stories reshaping the banking industry. Subscribe to have more hard-hitting takeaways delivered to your inbox daily.