How Regulators Could Strengthen the Banking System Without Sacrificing the Economy

“In spite of recent events, the overall banking system remains strong and resilient. These recommendations are intended to offer informed, thoughtful insights to policymakers as they contemplate what additional actions could further strengthen the system,” said Jamie Dimon, Chairman of BPI, Chairman of the Board and CEO of JPMorgan Chase & Co.

“These recommendations will provide assistance in considering any changes made to the banking system, which is the bedrock of the American economy,” said René Jones, Vice Chair of BPI and Chairman and CEO of M&T Bank Corporation. “New policies should address the root cause of the recent events to ensure that banks of all sizes can continue being a vital source of lending to families, businesses, and communities across America.” Said Greg Baer, BPI President and CEO, “Bank regulation is a complicated business, and comes with important costs and benefits. We have worked closely with our members to identify a series of policies that would target problems of interest rate and liquidity risk highlighted by Silicon Valley Bank and its fallout; we reject proposals by some that attempt to fit their favorite policy pegs into the unusually shaped hole that appeared in March.”

BPI is presenting two sets of recommendations: first, a small number of immediate steps that should be taken to avoid a significant reduction in bank lending; second, policy changes that would over the medium to long term improve bank resiliency and financial stability while minimizing costs to economic growth.

Immediate Steps

These steps include:

• Reducing the size of the Federal Reserve’s overnight reverse repo (ON RRP) facility as a competitor to small and mid-sized banks as they work to attract and retain deposits.
• Making clear that a general decline in deposit levels is an anticipated consequence of the FOMC’s monetary policy strategy and not a warning sign for the banking industry.
• Announcing a one-year extension of the Bank Term Funding Program.
• Announcing that any regulatory or supervisory changes affecting the treatment of securities on bank balance sheets will be adopted with a five-year delayed effective date.

Policy Recommendations

Liquidity

• The banking agencies should conduct a holistic review of their liquidity rules, with notice and public comment.  The recommendations include five key areas on which such a review should focus.
• The Federal Reserve should reform its existing array of balance sheet programs to better reduce bank sector liquidity risks while preserving bank lending and economic growth.  The recommendations include detailed policy and operational actions that the Federal Reserve could take to prevent a recurrence of the upset caused by Silicon Valley Bank’s troubles and eventual failure.
• The federal banking agencies and the FSOC should urge FASB to rationalize the accounting for held-to-maturity securities, and the hedging thereof.

Capital

• The banking agencies should reduce uncertainty by promptly promising to eliminate the AOCI filter for available-for-sale securities at certain banks, with a five-year delayed effective date, consistent with past precedent.
• With respect to held-to-maturity securities, the recommendations note the need for some changes but also the high costs of many potential changes, and urge the agencies to issue an advance notice of proposed rulemaking to gather ideas.
• BPI recommends that the Federal Reserve include an alternative, rising interest rate scenario in its capital stress tests while keeping the scenarios internally rational.

Examination
BPI includes a detailed series of recommendations on how the examination process could be improved to prevent a recurrence of the types of problems that occurred at SVB.  As detailed in prior notes and testimony from BPI staff, the history of SVB’s failure shows an examination process that was focused primarily on matters that did not create material financial or safety and soundness risk – e.g. vendor management, IT – and also focused far more on process and governance than outcomes.  This was particularly true when examination focus began to include interest rate and liquidity risk, where the emphasis was on process not the actual risk.

BPI includes a detailed series of recommendations on how to refocus the examination process, as the public release of examination materials has now given policymakers some sense of how examination has lost its way.

Industry consolidation
In the wake of SVB’s failure, there appears to be a widespread understanding that it is far preferable for small and mid-sized banks to merge in the ordinary course rather than over a weekend after the failure of one. That said, a sad history of inexplicable delays in processing bank M&A applications has chilled the market for industry consolidation.

Working closely with its members and other experts in the field, BPI presents a series of concrete steps that the banking agencies could take to bring transparency and speed to a process that is currently a mystery to potential applicants and the broader public.

Resolution practices
While most details are still unknown, by multiple accounts the resolution of SVB was a messy business. BPI presents recommendations on how that process could be improved, reducing losses and financial stability implications.

Securitization
As bank lending constricts, the fact that post-GFC regulation and examination has constricted securitization of bank assets becomes a more important problem for the economy. BPI presents recommendations on how securitization markets could be revitalized.

Opposition

BPI also identifies policies that it would oppose, including any general increase in capital requirements (e.g., pursuant to implementation of the 2017 Basel Accord) that is predicated on spring 2023 events; those events focused on “bread and butter” interest rate and liquidity risk, whereas the 2017 Basel Accord focused on market, credit and operational risk.

For the full list of policy recommendations, click here.

About Bank Policy Institute.

The Bank Policy Institute (BPI) is a nonpartisan public policy, research and advocacy group, representing the nation’s leading banks and their customers. Our members include universal banks, regional banks and the major foreign banks doing business in the United States. Collectively, they employ almost 2 million Americans, make nearly half of the nation’s small business loans, and are an engine for financial innovation and economic growth. www.bpi.com