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U.S. bank regulators say system is sound, but rules need review

Published 03/27/2023, 12:27 PM
Updated 03/27/2023, 04:01 PM
© Reuters. Michael Barr is sworn as Federal Reserve Vice Chair for Supervision by U.S. Federal Reserve Chairman Jerome Powell in the press briefing room of the William McChesney Martin Federal Reserve Board Building in Washington, U.S. July 19, 2022.  U.S. Federal R
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By Pete Schroeder

WASHINGTON (Reuters) -Top U.S. banking regulators plan to tell Congress that the overall financial system remains on solid footing after recent bank failures, but will comprehensively review their policies in a bid to prevent future collapses.

In prepared testimony, Fed Vice Chair for Supervision Michael Barr said that the banking system is "strong and resilient" and depositor money is safe. And Federal Deposit Insurance Corporation Chairman Martin Gruenberg will say the state of the U.S. financial system is sound, and that most banks are not seeing a significant exit of depositor funds.

However, both also said they are conducting comprehensive reviews of how their agencies monitored banks like Silicon Valley Bank and Signature Bank (NASDAQ:SBNY), which abruptly collapsed earlier this month, catching investors and regulators off guard.

The prepared testimony, released on Monday, will be delivered to the Senate Banking Committee on Tuesday during a hearing on bank oversight convening at 10:00 a.m. EDT (1400 GMT).

The pair also signaled that new bank rules are in the works, such as tightening up requirements for larger regional banks and how to police heavy reliance on uninsured deposits.

Gruenberg said the FDIC is also reviewing the deposit insurance system, and lay out options for policy changes. The Biden administration ultimately decided to guarantee all deposits at those two banks to stave off broader panic, forgoing the existing limit of $250,000 per person.

Barr said SVB's collapse was a "textbook case of mismanagement," citing the firm's concentrated business model, exceedingly fast growth, failure to manage its interest rate risk, and reliance on uninsured deposits.

Barr said supervisors for the Fed, which was the bank's primary regulator, found several deficiencies with the bank in 2021 and 2022, and ultimately imposed restrictions on its growth. But, he noted, the full extent of the bank's weakness was not apparent until the March 9 bank run, and it was up to management to address underlying issues.

"It is not the job of supervisors to fix the issues identified; it is the job of the bank's senior management and board of directors to fix its problems," his testimony states.

On regulation, Barr said the Fed is looking into whether SVB would have better managed its risk if it had still faced stricter oversight, as well as higher capital and liquidity requirements. Banks with assets between $100 billion and $250 billion saw their scrutiny relaxed as part of a 2018 bank deregulation bill.

© Reuters. Michael Barr is sworn as Federal Reserve Vice Chair for Supervision by U.S. Federal Reserve Chairman Jerome Powell in the press briefing room of the William McChesney Martin Federal Reserve Board Building in Washington, U.S. July 19, 2022.  U.S. Federal Reserve Board/Handout via REUTERS

Gruenberg also defended the FDIC's handling of SVB after its closure, in which it took over two weeks to line up a new buyer. He said the agency received only one "valid offer" for the bank's deposits the weekend SVB failed, and it would have cost the FDIC more to sell than to liquidate the firm's assets.

Once the new relief efforts kicked in and the FDIC was given more flexibility to consider offers, Gruenberg said the FDIC received 27 bids from 18 bidders for various parts of SVB. The FDIC announced Monday it would backstop a deal for regional lender First Citizens BancShares to acquire the bank's assets.

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