Martin Gruenberg, current FDIC Chair who also served as former FDIC Chair and Board Member gave a speech in 2019 which almost foresaw the Silicin Valley Bank crisis.
The speech was titled as An Underappreciated Risk: The Resolution of Large Regional Banks in the United States:
The subject I would like to discuss – the resolution of large, regional banks in the United States – has received relatively little attention during the ten years since the financial crisis of 2008-2009. Most of the attention, appropriately, has been on the challenges posed by the resolution of Global Systemically Important Banks (GSIBs).1
However, regional banks, which for the purposes of today’s discussion I will categorize as banks with assets between $50 billion and $500 billion, pose very significant resolution challenges to the FDIC distinct from those posed by GSIBs and by smaller banks. Their size, complexity, and reliance on market funding and uninsured deposits would present very substantial risks in resolution, with potential systemic consequences.
I view today’s program as an opportunity to have a public discussion about the risks and challenges presented by the resolution of large regional banks.
In order to establish a common baseline of understanding, I will begin today’s discussion with a brief description of the FDIC’s resolution process under the Federal Deposit Insurance Act. I will then discuss the distinct and underappreciated challenges posed by the resolution of regional banks. Finally, I will conclude with an overview of the actions taken by the FDIC to date to address these challenges.
Why was this risk ignored? He explains changes since 2008 crisis:
Since 2011, the FDIC has by rule required banks with assets over $50 billion to prepare resolution plans for the insured depository institution as a complement to the holding company resolution plan required under Title I of the Dodd-Frank Act.
The preamble to the 2011 rule stated its purpose, “the Rule requires a limited number of the largest insured depository institutions to provide the FDIC with essential information concerning their structure, operations, business practices, financial responsibilities, and risk exposures. The Rule requires these institutions to develop and submit detailed plans demonstrating how such insured depository institutions could be resolved in an orderly and timely manner in the event of receivership.”24
In 2014, the federal banking agencies adopted a rule implementing a quantitative liquidity coverage ratio.25 A company subject to the rule was required to maintain an amount of high quality liquid assets that is no less than 100 percent of its total net cash outflows over a prospective 30-calendar day period. The rule applied to bank holding companies and insured depository institutions with $250 billion or more in total assets. The Federal Reserve also adopted a modified liquidity coverage ratio standard based on a 21-calendar day stress scenario that applied to bank holding companies with total consolidated assets between $100 billion and $250 billion.
This rule, like the resolution plan rule, was based on the experience from the financial crisis that the liquidity failure of a large banking organization can occur very quickly. High quality liquid assets sufficient to provide a 30-day runway before failure for institutions with assets over $250 billion, and a 21-day runway for institutions with assets between $100 billion and $250 billion, were important requirements, from the FDIC’s perspective, given the risks associated with the failure of institutions of that size and the value to the FDIC of having an assured minimum period of time for preparation before the failure of such institutions.
Finally, in November 2016, the FDIC adopted a rule requiring institutions with over two million deposit accounts to improve the quality of their deposit data and make changes to their information systems so that the FDIC could make a rapid and accurate deposit insurance determination to facilitate the prompt payment of FDIC-insured deposits when large depository institutions fail. As the preamble to the final rule pointed out, “prompt payment of deposit insurance maintains public confidence in the FDIC, the banking system and overall financial stability.”26 The rule applies to 23 of the 39 institutions with assets between $50 billion and $500 billion
IN 2019, these powers were weakened:
Unfortunately, instead of further measures to strengthen the FDIC’s capabilities, there have recently been a number of measures finalized or proposed that would weaken or remove the requirements of these rulemakings.
In July of this year, the FDIC approved a final rule to allow banks with two million or more deposit accounts to delay from 2020 to 2021 their compliance with the requirement to improve their data and reconfigure their systems to support the FDIC’s ability to make rapid deposit insurance determinations in the event of the failure of the institution.28 This additional year extended the original three-year compliance period in the 2016 rule, which took effect in April 2017. The final rule also weakened the compliance requirements that had been established to ensure effective implementation of the rule.
In April, the FDIC issued an Advance Notice of Proposed Rulemaking that, while identifying the risks associated with a large bank failure, nevertheless seeks comment on a number of proposals that would weaken the current resolution plan requirements for insured depository institutions.29 For example, alternatives put forward for comment in the Advance Notice of Proposed Rulemaking would reduce the resolution plan content requirements for the largest insured depository institutions, reduce the frequency of resolution plan submissions, and eliminate the IDI plan all together for the smaller IDIs above $50 billion in assets.
Just yesterday, the FDIC Board adopted a joint final rule with the Federal Reserve that would eliminate the Dodd-Frank Act Title I resolution plan requirements at the holding company level, with one exception, for institutions with assets between $100 billion and $250 billion. It would also require the submission of such plans for institutions with assets between $250 billion and $500 billion just once every three years, with a full plan required only every six years, rather than every year as is now the case.30
In a separate joint final rule with the Federal Reserve and the OCC, the FDIC Board approved yesterday eliminating, with one exception, the liquidity coverage ratio for banking organizations with assets between $100 billion and $250 billion, and leaving in place a liquidity coverage ratio for banks with assets between $250 and $500 billion that would be only 85 percent of the current requirement.31
Given the risks associated with the failure of large regional banks, these measures are unwarranted and misguided. They only increase the challenges posed by the resolution of these institutions and the potential for disorderly failure, and disregard the lessons of the financial crisis.
Phew. It does not get more prescient than this!
Like this:
Like Loading...
Mostly Economics 