Proposed Bank Changes and Fed Comments

Federal Reserve Vice Chair for Supervision Michael Barr said, “I anticipate the need to strengthen capital and liquidity standards,” and that “We are evaluating whether application of more stringent standards would have prompted the bank to better manage the risks that led to its failure.” Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg stated that the two bank failures “demonstrate the implications that banks with assets of $100 billion or more can have for financial stability.” However, there has been political resistance in the Senate to raising capital rules that could further restrain banks and their ability to lend.

Barr and Gruenberg outlined several possible changes to increase the robustness of the banking system. The first is an enhancement of the Fed’s stress tests on banks to include multiple scenarios to identify various channels of contagion of failure. Barr mentioned the Fed will propose “a long-term debt requirement” for large banks “so that they have a cushion of loss-absorbing resources” and update liquidity rules to help prevent the situation where banks need to sell securities designated as “held to maturity” for significant losses. The FDIC will propose changes in May to the deposit-insurance coverage that currently has a cap at $250,000 per insured. Gruenberg echoed Barr’s attention for more scrutiny over banks’ securities portfolios.

The third interviewee was the Treasury undersecretary for domestic finance, Nellie Liang, who also called for regulatory updates stating, “We must ensure that our bank regulatory policies and supervision are appropriate for the risks and challenges that banks face today.” She went on to reiterate Treasury Secretary Janet Yellen’s prior statements that they are ready to take considerable action if necessary; similar to making uninsured depositors whole again.

All three of the interviewees confirmed they are confident that the banking system remains robust overall.

FOMC member Jim Bullard of the St. Louis Fed posted an essay on their website Tuesday saying, “my view, continued appropriate macroprudential policy can contain financial stress in the current environment, while appropriate monetary policy can continue to put downward pressure on inflation.” More plainly, he believes rate hikes can continue while other policies can be used to contain the current damage in the banking sector. He went on to elaborate, “The macroprudential policy response to these events has been swift and appropriate. Regulatory authorities have used some of the tools that were developed or first utilized in response to the 2007-09 financial crisis in order to limit the damage to the macroeconomy, and they’re ready to take additional action if necessary.”