Three regulators testified Tuesday in front of the House Financial Services Committee on recent failures in the banking sphere. While Federal Deposit Insurance Corp. Chair Martin Gruenberg’s 30 pages of remarks may have cornered the market on “thorough,” Federal Reserve Vice Chair for Supervision Michael Barr’s comments appeared the most prescriptive.
Here are six recommendations Barr gave in his testimony:
1. Stronger capital requirements.
Regulators “need to evaluate whether our capital requirements appropriately measure the ability of banks to absorb losses,” Barr said. “Had [Silicon Valley Bank] been required to reflect declines in the face value of available-for-sale securities in its capital, it may have held more capital to cover these losses.”
Requiring banks to hold more capital, Barr said, “will guard against the risks that we may not fully appreciate today and reduce the costs of bank failures.”
2. Re-evaluate how risk and asset size intersect.
Barr appeared to acknowledge the domino effect of Silicon Valley Bank’s failure may have come as a surprise.
“SVB’s distress proved to have broader consequences for the banking system, even though SVB was not extremely large, highly connected to other financial counterparties or involved in critical financial services,” Barr said.
Regulators “need to be especially attentive to the particular risks that banks with rapid growth, concentrated business models or other special factors might pose regardless of asset size,” he said.
Size is still important, though, Barr emphasized, adding that “supervision should intensify at the right pace as a bank grows.”
3. Improve oversight of incentive pay.
SVB prioritized the wrong metrics, Barr said. The bank’s senior management “responded to the poor incentives approved by its board of directors,” he said. “They were not compensated to manage the bank’s risk, and they did not do so effectively.”
4. Blame cuts two ways on interest-rate risk.
“SVB did not appropriately manage its interest-rate risk, and supervisors did not force the bank to fix these issues quickly enough,” Barr said.
5. The second part of that is cultural.
“We need to ensure we have a culture that empowers supervisors to act in the face of uncertainty,” Barr said, adding that he aims to improve the “speed, force and agility of supervision.”
Supervisors “did not fully appreciate the extent of the vulnerabilities as SVB grew in size and complexity, and when supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that SVB fixed those problems quickly enough,” Barr said.
Regulators “should be encouraged to evaluate risks with rigor and consider a range of potential shocks and vulnerabilities so that they think through the implications of tail events with severe consequences,” he said.
6. Re-evaluate liquidity risks.
That means renewed focus on a bank’s uninsured deposit base, Barr said. Regulators also should consider applying a new standard of liquidity requirements to a broader set of banks, he said, adding that any adjustments to regulations could take years, accounting for notice-and-comment periods and gradual phase-ins.
Barr and Gruenberg, in testimony Tuesday, each reviewed their agencies’ reports on the SVB and Signature Bank failures. Michael Hsu, acting chief at the Office of the Comptroller of the Currency, also testified Tuesday.