What's Next For Bank Regulations?

The failures of Silicon Valley and Signature banks could prompt the government to rewrite the rules of the banking system. 

As the fallout from collapsed lenders roil markets and the financial system, lawmakers and regulators are considering ideas to prevent them from happening again. On the table: Having the government guarantee more bank deposits, undoing Trump-era changes to regulations; punishing the leaders of failed lenders more harshly, or even relaxing rules on bank mergers. 

Recent comments by policymakers show that actions regulators have taken so far, including guaranteeing deposits and backstopping the banking system, could be just the beginning of the government’s response to the turmoil. 

“This is going to be a longer-term thing,” said Keith Noreika, chairman of the banking supervision and regulation group at Patomak Global Partners, who was acting comptroller of the currency in 2017. “This is not a problem that's going to be going away.” 

Raising the FDIC insurance limit

An idea gaining traction with both Republicans and Democrats is to have the FDIC guarantee deposits of more than $250,000. 

“Lifting the FDIC insurance cap is a good move,” said Senator Elizabeth Warren, a Massachusetts Democrat who sits on the banking committee, on CBS News’ Face the Nation on Sunday. “Small businesses need to be able to count on getting their money to make payroll, to pay the utility bills. Nonprofits need to be able to do that. These are not folks who can investigate the safety and soundness of their individual banks. That's the job the regulators are supposed to do.”

Warren said she was still considering what the new limit should be, mentioning figures from $2 million to $10 million.

Several Republicans voiced support, suggesting it has some bipartisan appeal. Senator Mike Rounds, a North Dakota Republican who also serves on the banking committee, said he was open to the idea on the same talk show. It would help small institutions compete with “too-big-to-fail” banking giants that are implicity backed up by the government, he said.

While that approach could shore up confidence in the banking system, it’s not without its drawbacks, Noreika said. 

“It sounds good, but it's not free,” he said. “And it definitely shifts the risk to others, including potentially the taxpayer.”

Repealing Trump-era changes to bank laws 

Last week, President Joe Biden asked Congress to toughen banking regulations, specifically targeting the 2018 rollback of the Dodd-Frank banking regulations. Originally, the rules were enacted to prevent a repeat of the 2008 financial crisis that kicked off the Great Recession. 

“Unfortunately, the last administration rolled back some of these requirements,” Biden said. “I’m going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely that this kind of bank failure will happen again and to protect American jobs and small businesses.”

Warren, together with Katie Porter, a Democratic congresswoman from California, introduced a bill last week to undo the 2018 changes to Dodd-Frank. The bill, however, faces little chance of passing the Republican-controlled house, especially since the 2018 law had support from some Democrats as well. Republicans and bank lobbyists have argued that the pre-2018 rules wouldn’t have prevented Silicon Valley Bank’s failure in any case.

Senator Sherrod Brown, an Ohio Democrat who chairs the banking committee, told Bloomberg TV last week that he wasn’t hopeful about Congress restoring Dodd-Frank’s stricter rules on capital requirements, liquidity standards, and stress tests for banks.

In the absence of legislation, Brown said regulators, including the Federal Reserve, could use their rulemaking powers to set tougher standards. 

Tougher rules for bank executives

President Joe Biden asked Congress last week to crack down on executives at failed banks who cash out before their collapse. Executives at Silicon Valley Bank reportedly sold $84 million of stock just before the collapse, according to news reports citing Smart Insider, a company that analyzes insider trades. 

Biden asked lawmakers to empower regulators to claw back salaries and bonuses, ban executives of failed institutions from the banking industry, and widen regulators’ authority to fine banking leaders for wrongdoing. 

Allowing more bank mergers

Two federal banking regulators, the FDIC and the Office of the Comptroller of the Currency, are evaluating merger rules. The crisis could drive them to give failing banks more flexibility to merge, Bloomberg Law said last week, citing regulatory experts. Loosening merger rules could allow banks to be bailed out by larger institutions without taxpayer money, Noreika said. 

For example, when the FDIC tried to auction Silicon Valley Bank last week, the nation’s four largest banks didn't submit bids. Regulators initially excluded them from the process because of merger rules, according to a report by Semafor. 

Mega-mergers, however, pose their own risks to the financial system, law professors quoted by Bloomberg Law noted.

While the government's initial response has likely helped quell the initial crisis, underlying problems still lurk in some banks' balance sheets, Noreika said.

"The fire is smoldering," Noreika said. "Maybe it's burning up or maybe it's died down, but will come back. Clearly, things have to be done."