The Federal Reserve is stepping up its oversight of regional banks in the wake of three bank collapses earlier this year, according to a report by Fox Business. The central bank has issued a number of private warnings to lenders with assets of $100 billion to $250 billion, urging them to improve their liquidity planning, capital adequacy, technology and compliance.
Regional banks face liquidity and interest rate risks
The Fed’s increased scrutiny comes after the stunning failures of First Republic Bank, Silicon Valley Bank and Signature Bank in March, which triggered a deposit run and a systemic crisis in the banking sector. The authorities had to intervene with emergency measures to restore confidence and stability in the system.
The regional banks are facing liquidity and interest rate risks as the Fed unwinds its unconventional monetary policy and raises its benchmark rate to the highest level since 2001. The drain of systemwide deposits and the decline in the value of fixed-rate assets have put pressure on the banks’ funding costs and capital buffers.
Fed issues private warnings to several regional lenders
The Fed has sent out a series of private notices, known as matters requiring attention (MRAs) and matters requiring immediate attention (MRIAs), to several regional lenders, including Citizens Financial Group, Fifth Third Bancorp and M&T Bank Corp., according to people familiar with the matter. These notices require a board-level reply that includes a timeline for corrective action.
The notices have touched on various aspects of the banks’ operations, such as their capital and liquidity planning, their technology and compliance systems, and their risk management practices. The Fed is looking for signs of stress or weakness that could pose a threat to the financial stability or consumer protection.
Failure to address warnings could lead to public enforcement actions
The MRAs and MRIAs are nonpublic admonitions that are intended to prompt the banks to address the issues identified by the regulators. However, if the banks fail to resolve these issues in a timely manner, they could face harsher public enforcement actions that could take years to lift.
Gary Bronstein, who leads the financial-services team at the law firm Kilpatrick Townsend & Stockton LLP, said that the main concern for the banks is the time frame for resolution. “We’re going to start seeing the supervisory staff impose tight deadlines on resolution. If banks are not resolving these issues pretty quickly, then we’ll see enforcement actions,” he said.
Fed vows to improve speed, force and agility of supervision
The Fed’s ramp-up in supervision is part of a broader effort to improve its oversight of the banking sector after Michael Barr, the Fed’s vice chair for supervision, vowed to “improve the speed, force and agility” of regulation earlier this year. Barr said that the Fed would focus on ensuring that banks have adequate capital and liquidity, robust risk management and governance, and effective consumer protection.
The Fed is also working with other regulators, such as the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), to coordinate their supervisory activities and share information. The regulators are expected to issue new guidance and rules for the banking sector in the coming months.
