By Bill Alpert
At a Tuesday hearing, House Republicans blamed recent bank failures on the Biden administration and clumsy regulation.
The Federal Reserve's bank supervision boss accepted blame -- but only for missing the warning signs at lenders like Silicon Valley Bank. That bank's March 8 failure might have been prevented if bipartisan legislation in 2019 hadn't exempted small banks from close oversight, said Fed Vice Chair for Supervision Michael Barr in his testimony before the House Financial Services Committee.
His audience disagreed. Committee Chairman Patrick McHenry (R., N.C.) called Barr's report a self-serving defense of the administration's "progressive views." The 2019 easing of Dodd-Frank oversight didn't cause Silicon Valley Bank's collapse, said Rep. French Hill (R., Ark.).
"It was clearly a failure of supervision and management," Hill said.
At the same time, in the Democratic-controlled Senate, members of the Banking Committee grilled executives from the failed Silicon Valley and Signature banks for their roles in their institutions' closures.
Political point-scoring at the hearing largely revisited views on the Fed's April 28 report on the Silicon Valley bust. The new information on Tuesday came from the latest Fed report on America's banking system, which was released ahead of the House hearing.
The Fed's semiannual Supervision and Regulation report is the first since deposit runs became a challenge for regional and community banks in March. While the May report confirms what trading markets already know -- that some banks have liquidity and loan problems -- it shows that the banking system is in good shape.
Capital ratios at large banks remain sound and well above regulatory minimums. Deposits have come down from the pandemic's historically high levels. From an April 2022 loans-to-deposits level of 61%, the ratio was up to 70% in April 2023, says the Fed report. That remains below the 10-year average of 72%.
Problem loan levels were also generally low -- at least as of December 2022. Exceptions included credit card and auto loan delinquencies, which rose with rates last year while remaining at historically low levels.
This year, Fed supervisors are closely monitoring commercial real estate loans secured by urban office buildings, where delinquency rates have shot above the 10-year average of 0.7%, to 1.8%. Office loans represented about 20% of commercial real estate loans as of December.
Delinquencies for hotel and retail loans are down from their 2020 pandemic spikes, but offices will suffer from a permanent shift to telecommuting, said the Fed. Community and regional banks hold higher concentrations of commercial real estate loans. So the regulator said it increased examinations of concentrated lenders in June 2022. Some reviews have led to ratings downgrades, according to the May report.
As it inspects community and regional banks this year, the Fed said it's also focusing on funding risks caused by rising rates and banks' liquidity coverage of their uninsured deposits. While some banks face challenges in raising funds, the industry's liquid assets remain above their 10-year average as a share of assets.
Joining Fed supervisor Barr at the House grilling was Martin Gruenberg, the chairman of the Federal Deposit Insurance Corp. The FDIC head acknowledged shortcomings in his agency's oversight of Signature Bank (ticker: SBNY), whose March 12 failure might have been prevented if the agency had acted quickly and forcefully on concerns known to its examiners.
An FDIC plan proposed last week would restock its funds while sparing small banks from the assessment charges, said Gruenberg.
Uninsured deposits in this decade are higher than anytime since the 1940s, said the FDIC chairman, while social media make banks runs a bigger threat than before. The FDIC has studied proposals for reforming deposit insurance.
The FDIC reviewed reform plans in a May 1 report. One possibility is to provide unlimited coverage, instead of just the $250,000 per customer protected today. Gruenberg said the FDIC prefers a targeted approach that would allow for different levels of coverage for different types of accounts -- with higher coverage for business accounts.
Write to Bill Alpert at william.alpert@barrons.com
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(END) Dow Jones Newswires
May 16, 2023 15:17 ET (19:17 GMT)
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