White House to midsized banks: boost liquidity, capital, testing

WASHINGTON (Reuters) – The White House on Thursday issued a plan officials say would substantially reduce the risk of another crisis in the banking industry, after U.S. banks failed and a Swiss lender needed a government rescue earlier this month.

The plan, which can be accomplished by regulators with their existing powers, mostly would put stricter requirements on larger regional banks, specifically those with between $100 billion and $250 billion in assets.

This group of banks, which saw regulations rolled back in 2019, includes Silicon Valley Bank and Signature Bank (OTC:) – which failed earlier this month – as well as First Republic Bank (NYSE:), M&T Bank Corp (NYSE:) and KeyBank NA.

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The White House plan would see regulators reinstate prior liquidity requirements for banks of that size which were relaxed under the Trump administration.

Those rules are aimed at ensuring banks have enough easily accessible funds to withstand downturns. The White House also called for new stress tests that factor in the risks of faster depositor withdrawals, after regulators were surprised at the speed of recent bank runs.

STRESS TESTS

The White House plan also calls for regulators to resume “stress testing” banks of that size every year, after the prior administration allowed those firms to be tested once every two years. The stress tests are an annual checkup of bank finances to ensure they can withstand a severe recession.

The White House noted that, due to its rapid growth and the relaxed schedule, Silicon Valley Bank was never actually tested before it collapsed.

The White House also suggested regulators look to broaden those tests to examine other stresses, including rising interest rates, which were central to recent bank failures.

LIVING WILLS

After the 2008 crisis, large banks were required to submit “living wills” to regulators, which would detail how they could be safely wound down if necessary. The White House plan calls for firms in the $100 billion to $250 billion range to also submit those plans, returning to another requirement that was relaxed in 2019.

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The plan also calls for tougher capital requirements for banks of that size, which would ensure they have a large enough cushion to withstand unexpected losses. One area regulators are already examining, which the White House supports, is requiring such banks to hold more long-term debt, which can serve as a source of funds in times of need.

STRICTER OVERSIGHT

The White House also wants to see regulators give more tools to bank supervisors, who monitor the day-to-day operations within large institutions.

One area of focus is shrinking the transition period in which growing banks can delay facing stricter rules that come with larger size. The White House said regulators should make sure banks are preparing for tougher large bank rules as they approach that threshold, and consider applying stricter rules sooner.