The Fed’s Options for Regulating Midtier Banks: An Honest Perspective

With the recent failures of midtier banks, namely Silicon Valley Bank and Signature Bank, the Federal Reserve is under pressure to adjust its regulatory regime for banks with assets between $100 billion and $250 billion. While the larger banks in the U.S. have regulatory requirements set by Congress, the Fed has more discretion for midtier banks. This opinionated article explores the Federal Reserve’s options for regulating mid-tier banks and the potential consequences of tighter regulation.

The Fed’s Authority to Regulate Midtier Banks

Legal experts agree that the Fed has a fair amount of discretion for how to tweak its oversight of mid-tier banks. Title 12 of the U.S. Code grants the Fed broad authority to impose new requirements on banks with more than $100 billion of assets to protect financial stability. These include requiring resolution plans, setting counterparty credit limits, and subjecting these banks to annual stress tests. These changes can be implemented through a rule change or by issuing an order.

Peter Conti-Brown, a professor of financial regulation at the University of Pennsylvania’s Wharton School of Business, believes that the U.S. framework for small and medium banks is lackluster compared to other countries that apply some version of the Basel Committee on Banking Supervision’s standards to all their banks. However, he agreed that it is within the Fed’s authority to unilaterally implement this structure in mid-tier banks.

The Potential Consequences of Tighter Regulation

While tighter regulation of midtier banks may seem necessary given the recent failures, it could have unintended consequences. Megan Greene, the chief economist at the Kroll Institute, warns that more regulation of smaller banks could drive activity out of the banking sector into the shadow banking sector. This lack of visibility on what’s happening in the shadow banking sector could be bad news for regulators and policymakers.

Greene also suggests that they likely would not have failed if Silicon Valley Bank and Signature Bank faced the same liquidity coverage ratios as their larger counterparts. This suggests that the Fed’s current regulatory regime for midtier banks may not be enough to protect against failures.

Related Facts

• Silicon Valley Bank and Signature Bank may not be the only mid-tier banks facing potential failure. In addition, the COVID-19 pandemic has increased the risk of bank failures due to the economic downturn.
• In 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act raised the threshold for stricter oversight from $50 billion to $250 billion, leaving midtier banks in a regulatory gray zone.
• The Fed has been criticized for its relaxed approach to regulating midtier banks, with some experts suggesting that it has prioritized large banks’ interests over smaller ones.

Key Takeaway

The Federal Reserve has a fair amount of discretion for adjusting its regulatory regime for mid-tier banks. While tighter regulation may be necessary to prevent future failures, it could also have unintended consequences that policymakers and regulators need to consider.

Conclusion

The recent failures of midtier banks have renewed the debate over how banks between $100 billion and $250 billion of assets should be regulated. The Fed has the authority to adjust its regulatory regime for midtier banks, but tighter regulation could drive activity into the shadow banking sector. As policymakers consider potential changes, weighing the benefits of tighter regulation against the potential risks is important.