US Regulators Did See The March Banking Collapse Coming

Four months before the second-largest bank failure took place in US history, the main banking regulators had their worry about the dangers that the large regional lenders went on to pose when it came to financial stability, as per an advisory meeting record that was reviewed by Reuters.

Apparently, Federal Deposit Insurance Corporation officials told an advisory panel on bank failures in November 2022 that large chunks of regional banks’ deposit balances were uninsured and warned of some drastic effects they might go on to have on other banks.

Martin Gruenberg, the FDIC chairman, told a meeting that took place in public, the details of which were not reported previously, that after the financial crisis of 2008, the regulators had gone on to make the biggest banks, which were perceived as global systemically important banks, safe.

Gruenberg remarked that the officials did not do the same when it came to regional banks, some of which grew in size and complexity,

In the November meeting, as per Gruenberg, they woke up and also realised that the failure of one of the large banking setups could actually prove to be an enormous banking issue with financial stability impacts.

The panel, which is named the Systemic Resolution Advisory Committee, had in it certain stalwarts from the banking world, economics, law, and finance, including the likes of former top regulators as well as sitting executives. Timothy Mayopoulos, who went on to be named as the chief executive of the Silicon Valley Bank after its debacle in March this year, had queried the regulators on the regional bank’s high percentage of uninsured deposits.

It is well to be noted that the banking regulators have come under scrutiny since March this year for failing to counter the crisis, which was due to Silicon Valley Bank, most of whose deposits happened to be uninsured. The FDIC is expected to release a report on April 28, which will have in it the details of its supervision of Signature and Silicon Valley Bank.

That said, the meeting in November does show that FDIC officials were well aware of the issues they might as well go on to face in the failures of regional banks; however, the key issues remained unsolved ahead of the failures that were witnessed in March this year.

It was just before the meeting in November that the Fed as well as the FDIC called for an advance public comment when it came to the future proposal that would also extend to large regional banks, which happened to be some of the same safeguards that are now required by international systemic banks.

The meeting was the first since the panel’s creation a decade ago, so as to consider the responses from the mid-tier of large financial institutions.

One of the members of the advisory committee, Margaret Tahyar, told Reuters that because each banking challenge happens to be different, the resolution planning had to contend with certain unanswered questions.