Federal Chair Jerome Powell said Thursday that the failure of Silicon Valley Bank and other regional banks shows the central bank needs to step up oversight of mid-sized banks.
“These events suggest a need to strengthen our supervision and regulation of institutions that are the size of Silicon Valley Bank,” Powell said in a speech in Madrid at the Bank of Spain’s Conference on Financial Stability. “I look forward to evaluating proposals for such changes and implementing them where appropriate.”
Powell’s comments come as the central bank looks to retool regulations for mid-sized banks. It is seeking to put in place a new set of higher capital requirements, known as Basel 3, that will force some to hold greater buffers against losses.
These tougher rules were already in the works before the collapse of several regional US banks in the spring. In the wake of those troubles, regulators made it clear that they wanted to make sure their new approach applied to institutions similar in size to First Republic or a Silicon Valley Bank. Both had more than $200 billion in assets at the time of their failures.
Powell said last week he does not expect smaller community banks to be subject to the higher capital requirements, which are expected to be proposed sometime this summer. Institutions with at least $100 billion in assets may have to comply.
Powell was asked repeatedly by Republicans on Capitol Hill last week about the risks of imposing higher capital requirements and how much capital is too much capital. The Fed chair acknowledged that higher requirements trade off balancing a more stable banking system against the potential for less lending.
“Much will depend on getting the specifics right, and we should bear in mind that there are always trade-offs in any financial regulation,” Powell said Thursday. “In addition, the US has benefited from its rich, multi-tiered banking ecosystem, and that diversity should be preserved.”
Powell said the banking system is much stronger as a result of the capital requirements and safeguards built around the largest banks since the financial crisis in 2008.
“The events of the past couple of months would have been much more difficult to manage had the largest banks been undercapitalized or illiquid,” he said.
Powell’s observations come after the Fed released results of its annual stress tests on Wednesday. These showed that all 23 US banks required to undergo the test could continue lending to households and businesses during a hypothetical severe recession. They had capital levels equivalent to more than 10% in aggregate, well above the 4.5% buffer the central bank requires.
“The bank runs and failures in 2023, however, were painful reminders that we cannot predict all of the stresses that will inevitably come with time and chance,” Powell said Thursday. “We therefore must not grow complacent about the financial system’s resilience.”
