Regulators and policymakers have called for more measures to try and prevent a repeat of the collapse of lenders such as Silicon Valley Bank. The saga has raised political hackles, with some arguing that post-GFC crisis legislation has been unwisely watered down, and others saying that SVB neglected basic risk management practice.

Senior US banking and policymaking officials have flagged a major change to bank regulations as they digest the impact of the collapse of Silicon Valley Bank, reports said.

“I anticipate the need to strengthen capital and liquidity standards” for banks with assets larger than $100 billion, Federal Reserve vice chair for supervision, Michael Barr, was quoted saying (source: Bloomberg, March 28) in answering questions at a Senate Banking Committee hearing.

Federal Deposit Insurance Corp. chairman Martin Gruenberg said, in his testimony to the panel, that the failures of SVB, and Signature Bank “demonstrate the implications that banks with assets of $100 billion or more can have for financial stability. The prudential regulation of these institutions merits additional attention, particularly with respect to capital, liquidity and interest-rate risk.”

Reports noted that fresh regulatory proposals, once formally presented, are set to meet concerted Republican opposition. 

One controversy is whether moves by the Biden administration to backstop all depositors in SVB – now owned by First Citizens Bank – had created a “moral hazard” risk of precisely the kind that post-2008 reforms had been supposed to prevent. One line of criticism is that the Dodd-Frank financial reforms of 2010, although eased in some respects by the Trump administration, remain so complex and burdensome that they paradoxically obscure rather than bring problems to light. Another question is enforcement of rules, rather than the nature of rules themselves. For example, one issue that has drawn regulators’ attention is how, from April 2022 to the start of this year, SVB did not replace its outgoing chief risk officer.

Barr and Gruenberg in their testimonies outlined steps such as widening the scope of US Federal Reserve stress tests to uncover financial contagion risks; the Fed will propose “a long-term debt requirement” for big banks that aren’t designated as global systemically important; authorities will also look at rules on liquidity to make the system more resilient.

Among the details of the SVB collapse is how there appears to have been a mismatch in the assets and liabilities of the bank – and a situation that was exposed when the value of long-dated debt securities were hit by rising rates, forcing SVB to try and plug a gap in its capital.