Recent Reports By Financial Regulators Show The Downside Of Letting Regulators Review Their Own Work

The Federal Reserve (Fed) and the Federal Deposit Insurance Corporation (FDIC) released reports on their actions regarding the collapses of Silicon Valley Bank (SVB) and Signature Bank (Signature) and what could be changed to prevent a similar bank collapse in the future. Both reports rightfully conclude that bank management at SVB and Signature played a role as to why both banks failed but did not dwell too long on this point. Bank leaders at both institutions were clearly at fault for why both banks failed and became 2 of the largest bank failures in U.S. history. 

The Fed’s report also states that regulators had begun to realize that SVB had issues with their management and risk years ago but had been slow to react to the problems occurring at SVB as the bank grew in size. The FDIC also stated similar themes about being slow to react to rising issues with Signature. In addition to the reports by the Fed and FDIC, a report released by the Government Accountability Office, a congressional watchdog, said regulators identified problems at both banks in recent years but didn’t escalate supervisory actions in time to prevent their failures. Regulators had the tools but didn’t act promptly or with enough speed to potentially prevent the collapse of these institutions. 

Regulators in both reports called for revamping rules on how banks are monitored and regulated but clearly had the tools at their disposal to address the issues at both banks. The Fed goes after a 2018 bill that rolled back certain regulations in the 2010 Dodd-Frank bank bill. The 2018 bill allowed for banks under $250 billion in assets to be subjected to less stringent oversight by financial regulators. Randal Quarles, former Vice Chair for Supervision at the Fed disputed the Fed’s finding by saying the report “provides no evidence at all for what it describes as one of its main conclusions—that a ‘shift in the stance of supervisory policy’ impeded effective supervision of the bank.” 

The FDIC also released a report calling for changes to the deposit insurance program by changing to a model of “targeted coverage” where the FDIC would set different insurance coverage levels based on the type of account at an insured institution. According to the FDIC, targeted coverage would extend greater deposit insurance coverage to business payment accounts without extending similar insurance to all deposits. The problem, and the FDIC acknowledges this in their report, is that it would be very difficult to distinguish between business payment accounts and other accounts leading to the real possibility that people will game the system in order to get access to the higher deposit insurance level. Not only would the FDIC have trouble distinguishing between the types of accounts that would qualify for a higher deposit insurance limit and those that would remain at the current level of $250,000, this policy would likely raise costs for all who use the banking system by increasing the deposit insurance fees paid by banks and that increase would be passed down to customers in the forms of higher fees on various financial services. Not only would increasing the deposit insurance limit, in any form, cause banking services to get more expensive for the average American it would lead to increased regulation on lenders according to FDIC Vice Chair Travis Hill. Any changes to regulations would take Congress passing legislation and Congress has so far shown that it is not interested in seriously moving legislation on financial regulations at this moment.  

Republicans in Congress and Republicans especially on the House Financial Services Committee have been skeptical of calls by Democrats and regulators to raise the deposit insurance cap or change various regulations overseeing financial institutions. Republicans have also been skeptical of the reports by the Fed and FDIC with Rep. Patrick McHenry (R-NC), chairman of the House Financial Services Committee, called the report by the Fed a “self-serving…justification of Democrats’ long-held priorities.” Regulators had the tools at their disposal necessary to properly regulate these failed banks and did not act decisively to prevent their collapses. Congress should continue to do what it’s been doing throughout this situation and continue to gather facts and hold regulators and bank leaders accountable. The American public deserves to get the full picture of why American banks are failing and relying on half pictures from regulators attempting to spin narratives to fit their desired policy goals is not what the public and lawmakers need and won’t cut it. 

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