2023 Bank Failures and the Re-Regulatory Cycle

The lessons learned from the Silicon Valley Bank (CA), Signature Bank (NY), and other bank failures of 2023, are that:

• The FDIC, NCUA, and other deposit insurers need to be more engaged in overseeing developing risks, such as today’s pervasive interest-rate risk.

• “Liquidity is king,” because without it – or at least easy access to it - runs can get out of control quickly and lead to much bigger problems for consumers, the economy, and all financial institutions.

• Social media can undermine an institution in minutes, not days.

• Consumers need to be more aware of the strength and capacity of the institution where they deposit their funds and the capacity of their deposit insurer and respective regulators to solve problems quickly.

The publicity of these events in early 2023, the size and unique business focus of the failed banks, and the reported mismanagement and poor asset/liability management practices at these banks, all surfaced in a profound way that many think could have been avoided. As we have learned in the past, the unchecked presence of these types of conditions can lead to banking failures that subsequently result in the emergence of a re-regulatory cycle in Congress and at the state level.

As with the banking crises of 1983-1986 and 2007-2009, Congress often revisits the statutory and regulatory oversight of ALL financial institutions in the years following such notable cyclical events, as was seen with FIRREA in 1989, The Dodd-Frank Act in 2010 and others, so federal legislation is inevitable following the subject bank failures of 2023.  

An early example of this type of re-regulatory legislation can be seen in Senate Bank Committee Chairman Sherrod Brown’s RECOUP Act of 2023 (S.2190), which he introduced in the U.S. Senate on June 22, 2023. While S.2190 deals solely with the FDIC and its authority over problem banks and their executives, based on history, this may just be the beginning of more banking and credit union federal and state legislation and/or regulation.

Will NCUA gain new powers? Will there be expanded stress testing of all credit unions? Will deposit and share insurance coverage limits change? Will credit union executives and board members be held to the same high standard by their share insurer(s)?

These are all questions that may arise over the next year as S.2190 and possibly other legislative initiatives surface and advance through Congress.

More to come on S.2190 and potential re-regulation!