FDIC Chairman leads efforts to stabilize banking system and protect depositors in wake of bank failures
The recent failures of Silicon Valley Bank and Signature Bank have prompted the FDIC to take swift action to protect depositors and prevent further contagion. The FDIC, which was appointed as the receiver for both banks after they were closed by state regulators, recommended the use of emergency systemic risk authorities under the Federal Deposit Insurance Act to fully protect all depositors in winding down SVB and Signature Bank.
While the failure of these institutions caused concerns about a broader economic spillover from these failures, it is important to note that these two institutions were allowed to fail, and shareholders lost their investment. Unsecured creditors also took losses, and the boards and the most senior executives were removed. The FDIC has authority to investigate and hold accountable the directors, officers, professional service providers and other institution-affiliated parties of the banks for the losses they caused to the banks and for their misconduct in the management of the banks.
In his testimony before the Committee on Banking, Housing and Urban Affairs, Chairman Martin J. Gruenberg of the FDIC discussed the FDIC’s assessment of the current state of the U.S. financial system, which remains sound despite recent events. He also shared some preliminary lessons learned as the FDIC looks back on the immediate aftermath of this episode.
The FDIC will undertake a comprehensive review of the deposit insurance system and will release a report by May 1, 2023, that will include policy options for consideration related to deposit insurance coverage levels, excess deposit insurance, and the implications for risk-based pricing and deposit insurance fund adequacy. The FDIC’s Chief Risk Officer will also undertake a review of the FDIC’s supervision of Signature Bank and will release a report by May 1, 2023.
The failures of these two banks demonstrate the implications that banks with assets over $100 billion can have for financial stability. The prudential regulation of these institutions merits serious attention, particularly for capital, liquidity and interest rate risk. Following the failure of SVB and Signature Bank, the financial industry faced a significant amount of uncertainty and fear.
Ultimately, the failures of SVB and Signature Bank serve as a stark reminder of the risks inherent in the financial system and the need for continued vigilance by regulators, policymakers, and industry participants. The FDIC’s review of its supervision of Signature Bank will be crucial in identifying any weaknesses in its oversight of the bank and determining whether any regulatory changes are necessary. The review of the deposit insurance system will also be critical in ensuring that the system remains adequate and effective in protecting depositors. Policymakers in Congress may also consider regulatory changes aimed at preventing similar failures in the future.