Banking Regulations for Preventing Failures

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Banking regulators have the power to prevent future bank collapses, according to a panel of banking experts who emphasized the importance of utilizing existing tools for both large and small banks.

Inconsistencies in Regulation Highlighted

William Demchak, Chief Executive of PNC Financial Services Holdings Inc., pointed out the key lesson learned from the collapse of Silicon Valley Bank and two other S&P 500 components last year – the uneven regulation between big and small banks. He highlighted that Silicon Valley Bank’s issues, such as unrealized losses on fixed-rate holdings and potential liquidity problems, were visible well before interest rates began to rise. Demchak criticized regulators for not fulfilling their duties, stating that lighter-touch regulations for smaller banks have been detrimental.

New York Community Bancorp’s Struggles

The impact of stricter regulations was evident when New York Community Bancorp had to cut its dividend and raise additional capital to meet the requirements of a larger bank. This led to a significant decline in the bank’s stock price, revealing issues with stressed loans and internal controls.

Effects of Recent Bank Failures

The failures of Signature Bank and First Republic Bank last year have further emphasized the importance of ensuring proper supervision and regulation in the banking sector. As deposits flow towards larger institutions, smaller banks are facing challenges to remain competitive.

Call for Action

Tobias Adrian, Director at the International Monetary Fund, highlighted that supervisors had identified issues with Silicon Valley Bank’s balance sheet before its collapse but failed to take aggressive actions. The need for proactive regulatory measures was emphasized to prevent similar incidents in the future.

Improving Technology to Prevent Bank Runs

Patrick McHenry, Republican of North Carolina and chairman of the House Financial Services Committee, believes that enhancing the technology used by the U.S. Federal Reserve for the discount lending window is crucial in preventing future bank runs. Instead of the current system that requires phone calls, McHenry suggests that it should be a simple push of a button for banks to access capital instantly in times of need.

Limit Per Customer and Potential Changes

McHenry stated that there are no immediate plans in the current Congress to overhaul the $250,000 limit per customer set by the Federal Deposit Insurance Co. However, he expressed willingness to study possible changes in the future.

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

Reducing Stigma of Discount Window

Susan McLaughlin, executive fellow at the Yale Program on Financial Stability, highlighted the importance of reducing the stigma associated with the discount window. She mentioned that this stigma could have contributed to the delayed response in preventing the collapse of Silicon Valley Bank.

PNC Chief Executive Demchak and other industry experts echoed McLaughlin’s sentiments. Rather than utilizing the discount window, many banks have been seeking assistance from regional Federal Home Loan banks. Demchak suggested that rebranding or redefining the role of the discount window could encourage more banks to utilize it effectively.

“By using the term ‘lender of last resort’ for the discount window, you’ve effectively told the world you failed,” Demchak pointed out. “It should not be viewed as a last resort, but as a source of funding that supports the banking system.”

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

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