Post-Silicon Valley Bank, regulators are still not aggressive enough to prevent bank collapses

By Steve Gelsi

Remedies include greater use of the discount loan window and more strength at the supervisory level.

Banking regulators could prevent new banking collapses by being more aggressive with the tools they already have for banks large and small, a panel of banking experts said on Tuesday.

PNC Financial Services Holdings Inc. (PNC) CEO William Demchak said the biggest lesson from the demise of Silicon Valley Bank that caused it and two other components of the S&P 500 SPX to collapse last year is that "the regulation is unequal" between large and small banks. .

Unrealized losses on Silicon Valley Bank's fixed-rate holdings on its balance sheet and its potential liquidity problems were obvious long before interest rates began rising, he said.

"Regulators didn't do their job," Demchak said at a Brookings Institution panel titled "One Year Later: Lessons Learned from the March 2023 Bank Failures."

"We have deliberately allowed smaller banks to have lighter regulations," Demchak said.

That unequal regulation issue arose this year when New York Community Bancorp (NYCB) cut its dividend and raised more capital to meet a larger bank's stricter threshold. The bank's stock price has fallen sharply due to this action, along with other revelations about distressed loans and lack of internal controls.

Also Read: New York Community Bank Stock Drops After Leadership Changes and Notice of 'Material Weaknesses'

Also Read: New York Community Bancorp Stock Crushed by Surprise Loss, Dividend Cut and Cost of Two Loans

New York Community Bancorp faced higher capital requirements after absorbing assets from Signature Bank, the second lender to fail last year, followed by First Republic Bank.

Bank failures have accelerated the flow of deposits to larger banks and made larger institutions more prominent, Demchak said. As the eighth-largest bank in the U.S., "we benefit net from this," he said.

Tobias Adrian, a financial adviser and head of the International Monetary Fund, said Silicon Valley Bank supervisors brought to management's attention problems with the bank's balance sheet long before the problems began, but they were ignored.

"The supervisors were hesitant to act aggressively," he said.

Patrick McHenry, Republican of North Carolina and chairman of the House Financial Services Committee, said one way to avoid future bank runs would be to improve the technology used by the US Federal Reserve for the discount loan window, which is a way for banks to raise capital to cover sudden deposit outflows or other problems.

"It should be pressing a button instead of a phone call," McHenry said. "It should be done in an instant instead of days."

No new action is expected in the current Congress to revise the $250,000 per customer limit set by the Federal Deposit Insurance Co., McEnery said. But he would be willing to study it.

"It has to be based on data rather than securing someone who would then nationalize our banking system," McHenry said.

Susan McLaughlin, an executive fellow at the Yale Financial Stability Program, said the Federal Reserve and other regulators should work to reduce the stigma of the discount window, which could have slowed the collapse of Silicon Valley Bank.

"If the banks are not willing to use the window, then the discount window can't do its job," McLaughlin said.

PNC Executive Director Demchak and other panelists agreed. Instead of using the discount window, many banks have turned to regional federal home loan banks. Demchak said a rebranding or reworking of the discount window's role could prompt use of it.

"By using the term 'lender of last resort' [for the discount window], then the day you ask for it for something other than a test, you have effectively told the world that you failed," Demchak said. "It shouldn't be the lender of last resort. What should help is the financing of the banking system."

Also Read: New York Community Bancorp 'is on its own' to sort out accounting mess, analyst says

-Steve Gelsi

This content was created by MarketWatch, operated by Dow Jones & Co. MarketWatch is published independently of Dow Jones Newswires and The Wall Street Journal.

 

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05-03-24 1357ET

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