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

By Steve Gelsi

Remedies include increased use of discount lending window and more force at the supervisory level

Banking regulators could prevent further bank collapses by being more aggressive with tools they already have for both big and small banks, a panel of banking experts said Tuesday.

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

The unrealized losses on Silicon Valley Bank's fixed-rate holdings in its balance sheet and its potential liquidity problems were obvious well before interest rates started to rise, he said.

"Regulators did not do their job," Demchak said at a Brookings Institution panel titled, "One year later: Lessons learned from the March 2023 bank failures."

"We purposefully have allowed smaller banks to have lighter-touch regulations," Demchak said.

That issue of uneven regulation surfaced this year as New York Community Bancorp (NYCB), cut its dividend and raised more capital to meet the tougher threshold of a larger bank. The bank's stock price has fallen sharply on this action, along with other disclosures about stressed loans and lack of internal controls.

Also read: New York Community Bank's stock slides after leadership changes, 'material weaknesses' notice

Also read: New York Community Bancorp's stock crushed on surprise loss, dividend cut and cost of two loans

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

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

Tobias Adrian, financial counselor and director at the International Monetary Fund, said supervisors at Silicon Valley Bank flagged issues with the bank's balance sheet to management well before its troubles began, but were ignored.

"The supervisors hesitated to act aggressively," he said.

Patrick McHenry, Republican of North Carolina and chairman of the House Financial Services Committee, said a way to prevent future bank runs would be to improve the technology used by the U.S. Federal Reserve for the discount lending window, which is a way for banks to get capital to cover sudden flights in deposits or other problems.

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

No fresh measures to overhaul the $250,000 limit per customer by the Federal Deposit Insurance Co. are expected in the current Congress, McEnery said. But he'd be open to studying it.

"It needs to be data driven rather than insuring anyone which would then nationalize our banking system," McHenry said.

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

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

PNC Chief Executive Demchak and other panelists agreed. Instead of using the discount window, many banks have been turning to regional Federal Home Loan banks. Demchak said a re-branding or re-working of the discount window's role could coax into using it

"By using the term 'lender of last resort' [for the discount window], then the day you hit it for anything other than a test, you've effectively told the world you failed," Demchak said. "It should not be lender of last resort. It should be funding into the banking system that helps."

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

-Steve Gelsi

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03-05-24 1357ET

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