One year after a series of bank runs threatened the financial system, government officials are preparing to unveil a regulatory response aimed at preventing future meltdowns.
After months of floating fixes at conferences and in quiet conversations with bank executives, the Federal Reserve and other regulators could unveil new rules this spring. At least some policymakers hope to release their proposal before a regulation-focused conference in June, according to a person familiar with the plans.
The interagency clampdown would come on top of another set of proposed and potentially costly regulations that have caused tension between big banks and their regulators. Taken together, the proposed rules could further rankle the industry.
The goal of the new policies would be to prevent the kind of crushing problems and bank runs that toppled Silicon Valley Bank and a series of other regional lenders last spring. The expected tweaks focus on liquidity, or a bank’s ability to act quickly in tumult, in a direct response to issues that became obvious during the 2023 crisis.
The banking industry has been unusually outspoken in criticizing the already-proposed rules known as “Basel III Endgame,” the American version of an international accord that would ultimately force large banks to hold more cash-like assets called capital. Bank lobbies have funded a major ad campaign arguing that it would hurt families, home buyers and small businesses by hitting lending.
Last week, Jamie Dimon, the chief executive of JPMorgan Chase, the country’s largest bank, vented to clients at a private gathering in Miami Beach that, according to a recording heard by The New York Times, “nothing” regulators had done since last year had addressed the problems that led to the 2023 midsize bank failures. Mr. Dimon has complained that the Basel capital proposal was taking aim at larger institutions that were not central to last spring’s meltdown.
The tumult last year came as regional bank depositors, spooked by losses on bank balance sheets, began to worry that the institutions might collapse and rapidly pulled out their deposits. The runs tied back to problems with bank liquidity — a firm’s ability to get access to money quickly in a panic — and were concentrated among large, but not enormous, banks.
Because the new proposal is likely to address those issues head-on, it could be tougher for the banks to loudly oppose.
It is likely to be “a response to what happened last year,” said Ian Katz, managing director at Capital Alpha Partners. “That makes it a little bit tougher for the banks to push back as vociferously.”
While the details are not final, the fresh proposal is likely to include at least three provisions, according to people who have talked 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 prod or perhaps even force banks to put themselves in a position to borrow from the Fed’s short-term funding option, called the discount window. The tool is meant to help give banks access to funding during tough times, but firms have long been hesitant to use it, worried that tapping it will signal to investors and depositors that they are in a dire position.
Second, the proposal is likely to treat some customer deposits differently in a key regulation that is meant to ensure that banks have enough money available to get through a rough patch. Regulators could acknowledge that some depositors, like those with accounts that are too large for government insurance or those in business lines like crypto, are more likely to take their money and run in times of trouble.
And finally, the new rules could address how bank regulations account for so-called held-to-maturity securities, which are intended to be hung on to and can be hard to monetize in times of stress without incurring big losses.
All of those measures would tie back to the saga of Silicon Valley Bank’s collapse last March.
Several interwoven problems led to the bank’s demise — and to the broader chaos that followed.
The California bank had run into a financial slowdown and needed to liquidate holdings that it had initially classified as held to maturity. Silicon Valley Bank was forced to admit that higher interest rates had sharply eroded the value of those securities. As the losses were made public, the bank’s depositors became spooked: Many of them had accounts that exceeded the $250,000 covered by government insurance. Many uninsured depositors asked to withdraw their money all at once.
The bank wasn’t prepared to quickly borrow from the Fed’s discount window, and it struggled to gain access to enough fast funding.
As it became clear that Silicon Valley Bank would fold, depositors around the country began to pull their money from their own banks. Government officials had to intervene on March 12 to make sure that banks broadly would have reliable sources of funding — and to reassure jittery depositors. Even with all of that intervention, other collapses ensued.
Michael Hsu, the acting comptroller of the currency, gave a speech in January arguing that “targeted regulatory enhancements” were needed in light of the meltdown last year.
And Michael Barr, the vice chair for supervision at the Fed, has said regulators have been forced to reckon with the fact that some depositors may be more likely than others to pull their money in times of trouble.
“Some forms of deposits, such as those from venture capital firms, high-net-worth individuals, crypto firms and others, may be more prone to faster runs than previously assumed,” he said in a recent speech.
Banks are likely to oppose at least some — potentially costly — provisions.
For instance, banks are required to hold high-quality assets that they can monetize to get through tough times. But the rules might force them to recognize for regulatory purposes that their held-to-maturity government bonds would not sell for full value in a pinch.
That would force them to stock up on more safe debt, which is typically less profitable for banks to hold.
Bank executives regularly argue that the costs of complying with heavier oversight ultimately trickles down to consumers in the form of higher fees and rates for loans, and confers advantages on less heavily regulated competitors like private-equity firms.
But the very fact that banks have been so outspoken about the capital regulations may leave them with less room to gripe about the new liquidity rules, said Jeremy Kress, a former Fed banking regulator who is now co-faculty director of the University of Michigan’s Center on Finance, Law & Policy.
“There is a risk of the boy who cried wolf,” Mr. Kress said. “If they’re fighting every reform tooth and nail, their criticisms are going to start to lose credibility.”
