The Federal Reserve (Fed) may reverse its 2019 decision to ease regulations on mid-sized banks.
The Fed is actively considering closing a policy loophole that helped some mid-sized banks offset losses on their securities holdings, one of the factors that contributed to the collapse of Silicon Valley Bank (SVB). March.
The Fed’s program is led by Vice President for Oversight Michael Barr. The agency is considering ending an exemption for some banks to raise capital for regulatory purposes, people familiar with the matter told the Journal. As a result, banks will be forced to prepare “capital buffers” to absorb possible losses.
Federal Reserve officials are weighing regulatory issues after the sudden failures of Silicon Valley Bank and Signature Bank last month rocked the U.S. financial system.
If passed, the new rules would buck the looser rules the Fed introduced in 2019 and tighten oversight of midsize banks by expanding restrictions that currently only apply to banks. Row. The largest and most complex companies.
Fed officials are reportedly considering expanding the tougher restrictions to about 30 companies with assets between $100 billion and $700 billion. The proposal could be rolled out as soon as this summer, and any changes would be implemented in phases that could take years.
Banks in the region, including US Bancorp, PNC Financial Services Group, Truist Financial Corp. and Capital One Financial Corp., could be affected and have to raise capital.
That could force them to take steps such as reducing buybacks, retaining more profits or raising new funds from investors. However, many U.S. banks intend to oppose the regulatory changes.
After SVB collapsed, Mr Barr hinted at a series of tougher rules. The Fed vice chair expects the changes to increase the resilience of the U.S. financial system. In addition, the Fed Vice Chair noted that SVB’s capital levels do not necessarily reflect unrealized losses on certain securities.
“We are assessing whether adopting stricter standards would promote better failure risk management,” the Fed vice chair told U.S. lawmakers.
The potential changes mentioned by Mr Barr relate to how banks must reflect unrealized gains and losses on securities marked as “available for sale” (AFS) when implementing regulatory capital measures. Banks can choose to sell these securities or hold them to maturity.
Under post-financial crisis rules, U.S. banks with assets worth more than $250 billion must factor unrealized gains and losses on those securities into their capital ratios. However, smaller regional banks were allowed to ignore the rule, arguing that it would cause their capital ratios to fluctuate too much. In addition, in 2019, the largest regional banks in the United States were also exempted from the above regulations.
The changes the Fed is considering could reverse post-financial crisis policy, meaning unrealized losses would drain banks’ capital.
The exemption for “for-sale” securities was one of the factors that led to SVB’s downfall. Last month, SVB announced it had lost nearly $2 billion selling securities and said it would sell shares to raise funds.
SVB’s move has raised concerns about the potential for existing shareholders to dilute their stakes and raises the risk of unrealized losses for investors on the bank’s books. SVB shares then plummeted, and customers massively withdrew $42 billion in deposits a day later.
SVB’s unrealized losses were even larger than the bank’s basket of individual securities held to maturity. However, such losses were not recognized in SVB’s financial statements or authorized capital.
The changes the Fed is considering do not apply to the treatment of losses on those securities, but could be addressed at a later date.
Proponents of changes to the Fed’s regulation of bank capital levels argue that as interest rates start to rise and the value of assets held falls, it will force SVB to fix things quickly.
At the same time, the bank said the change could lead to higher government borrowing costs and mortgage rates. They believe that having to hold more capital, combined with restrictions on the securities they intend to hold to maturity, may cause them to scale back their purchases of long-dated Treasuries and securities. make sure. Mortgage loans (MBS).