Global regulators are considering imposing tougher rules on smaller lenders and requiring all banks to ready themselves for faster runs on deposits as officials search for lessons from the recent turmoil that led to the failure of several midsized US institutions.
The Basel Committee on Banking Supervision, which sets global standards, promised in March to examine whether additional rules were needed in light of a string of recent banking collapses.
No timeframe has been set for the work. But policymakers gathered in Washington for the IMF spring meetings last week told the Financial Times that attention would focus on issues exposed by the demise of Californian institution Silicon Valley Bank.
That could mean forcing medium-sized lenders, such as SVB and the now defunct Signature Bank, to comply with Basel rules on capital and liquidity. While all EU lenders must adhere to the rules, in the US they currently only apply to “internationally active” banks — a group limited to the largest institutions.
Three senior regulators said that the “internationally active” concept was outdated and that policymakers would explore whether the rules should be applied to banks of “international relevance”, or those with potential to destabilise the broader financial system.
The Californian lender’s demise sent tremors across global markets, leading to sharp plunges in the value of bank stocks from Paris to New York. “SVB has shown you don’t have to be internationally active to be able to generate cross-border spillovers,” one senior policymaker said.
While SVB did not have to apply the Basel rule book, when it ran into difficulty the US authorities decided to use a “systemic risk exception” to rescue all of its depositors, even though only sums up to $250,000 were insured.
Officials have also spoken publicly about re-examining rules on bank liquidity, known as the liquidity coverage ratio. Two policymakers said that this could involve requiring banks to be able to withstand much faster bank runs because SVB’s collapse highlighted the dramatic pace at which deposits could flee in a digital era.
Those policymakers, and several others, said that they were looking at the issue of digital deposit runs more generally, and exploring measures to buffet the system from them, although they acknowledged that the work would be challenging.
Policymakers are also considering a more prescriptive approach to how regulators ensure their banks can cope with interest rate changes, after the collapse in the value of SVB’s bond portfolio triggered by interest rate rises torpedoed the bank’s balance sheet and ignited a run on deposits.
“Interest Rate Risk in the Banking Book” — a measure that looks at things like how interest rate changes affect banks’ cash flow from loans and the value of their bonds — is now assessed as part of the “Pillar 2” capital requirements imposed at supervisors’ discretion.
Several regulators said that there was a case for moving this to the main capital requirements, known as Pillar 1, where there would be less variation among jurisdictions and institutions. The US, which stringently opposed this idea in earlier Basel packages, is expected to protest less vociferously this time around given recent events, two of the people said.
Regulators will also look at whether there is a case for global standards on how government bonds are valued on banks’ books, since banks in the US and Europe invoke different treatments now.
The Financial Stability Board, another regulatory body based in Basel, is separately examining the resolution planning framework because the Swiss authorities deemed Credit Suisse’s living will unworkable when the bank needed a rescue takeover by Swiss rival UBS in March. But policymakers say the resolution regime has value and they do not expect major changes.
The BCBS and the FSB declined to comment.