Bank Runs Spooked Regulators. Now a Clampdown Is Coming.

Bank Runs Spooked Regulators. Now a Clampdown Is Coming.

A year after a series of bank runs threatened the financial system, government officials are preparing to release a regulatory response aimed at preventing future collapses.

After months of tentative decisions at conferences and in quiet discussions with bank executives, the Federal Reserve and other regulators could announce new rules this spring. At least some policymakers hope to release their proposal before a regulatory conference in June, according to a person familiar with the plans.

The multi-agency crackdown would come on top of a raft of other proposed and potentially costly regulations that have raised tensions between major banks and their regulators. Taken together, the proposed rules could further unsettle the industry.

The aim of the new guidelines would be to prevent the crushing problems and bank runs that toppled Silicon Valley Bank and a number of other regional lenders last spring. The expected adjustments focus on liquidity, or a bank’s ability to respond quickly in turbulent times, in direct response to problems that became apparent during the 2023 crisis.

The banking industry has been unusually vocal in its criticism of already proposed rules called the “Basel III Endgame,” the American version of an international agreement that would ultimately force big banks to hold more cash-like assets, known as capital. Bank lobbyists have funded a major advertising campaign arguing that curbs on lending would hurt families, home buyers and small businesses.

Last week, Jamie Dimon, chief executive of JPMorgan Chase, the nation’s largest bank, told clients at a private meeting in Miami Beach that regulators had done “nothing” to address the issue since last year, according to a New York Times transcript Addressed problems that led to the bankruptcies of medium-sized banks in 2023. Mr. Dimon has complained that the Basel capital proposal targeted larger institutions that did not play a central role in last spring’s meltdown.

Last year’s unrest came as regional bank depositors, frightened by losses on bank balance sheets, worried that the institutions would collapse and quickly withdrew their deposits. The runs stemmed from problems with bank liquidity – a company’s ability to get money quickly in a panic – and were focused on large, but not huge, banks.

Because the new proposal is likely to address these issues head-on, it may be harder for banks to vocally oppose it.

It’s likely to be “a reaction to what happened last year,” said Ian Katz, managing director of Capital Alpha Partners. “That makes it a little more difficult for the banks to take such vocal action against it.”

Although the details are not yet final, the new proposal will likely include at least three provisions, say people who have spoken to regulators about what is in the works. The rules are expected to be proposed by the Fed, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.

First, the new proposal would encourage, perhaps even force, banks to put themselves in a position to borrow through the Fed’s short-term funding option, called the discount window. The tool is intended to give banks access to finance in difficult times, but companies have long been reluctant to use it, fearing that using the tool would signal to investors and depositors that they are in a difficult situation.

Secondly, the proposal is likely to result in some customer deposits being treated differently in a key regulation designed to ensure banks have enough money to get through a difficult period. Regulators could recognize that some depositors, such as those with accounts too large for government insurance or those in business sectors such as crypto, are more likely to take their money and run in difficult times.

Finally, the new rules could address how banking regulations account for so-called held-to-maturity securities, which are meant to be held on and are difficult to monetize in times of stress without incurring large losses.

All of these measures would be linked to the saga of the Silicon Valley Bank collapse last March.

Several intertwined problems led to the bank’s demise—and the greater chaos that followed.

The Californian bank was in financial crisis and had to liquidate holdings that it had originally classified as held to maturity. The Silicon Valley bank was forced to admit that higher interest rates had severely reduced the value of these securities. When the losses became known, the bank’s depositors were terrified: many of them had accounts that exceeded the $250,000 amount covered by government insurance. Many uninsured depositors asked to withdraw their money all at once.

The bank was unwilling to borrow quickly from the Fed’s discount window and had difficulty gaining access to sufficiently rapid funds.

When it became clear that Silicon Valley Bank would collapse, depositors across the country began withdrawing their money from their own banks. Government officials had to intervene on March 12 to ensure that banks broadly had reliable sources of funding – and to reassure nervous depositors. Despite all these interventions, further collapses occurred.

Michael Hsu, the acting Comptroller of the Currency, gave a speech in January arguing that “targeted regulatory improvements” were needed given last year’s meltdown.

And Michael Barr, vice chairman for supervision at the Fed, said regulators were forced to expect that some depositors might be more likely than others to withdraw their money in difficult times.

“Some forms of deposits, such as those from venture capital firms, high net worth individuals, crypto firms and others, may be more vulnerable to faster runs than previously thought,” he said in a recent speech.

Banks are likely to resist at least some – potentially costly – regulations.

For example, banks need to have high-quality assets that they can monetize to weather difficult times. But the rules could force them to acknowledge, for regulatory reasons, that their held-to-maturity Treasury bonds could not be sold for full value in an emergency.

That would force them to stock up on safer debt, which is typically less profitable for banks to hold.

Bank executives routinely argue that the costs of complying with stricter supervision are ultimately passed on to consumers in the form of higher fees and interest rates on loans, giving advantages to less regulated competitors such as private equity firms.

But the very fact that banks have been so vocal about capital rules may leave them with less room to complain about the new liquidity rules, said Jeremy Kress, a former Fed banking regulator and now co-faculty director of the University of Michigan Center on finance, law and politics.

“There is a risk of the boy crying,” Mr. Kress said. “If they fight every reform with all means, their criticism will gradually lose credibility.”

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2024-03-05 10:04:02