In less than three months, Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank collapsed due to liquidity and interest rate risk issues. The total assets of these three institutions were $548.5 billion, surpassing the total assets of all bank failures in 2008 by almost $200 billion. Aggressive increases in the federal funds rate led to decreased values in long term bond and mortgage-backed securities and lowered the institutions’ ability to meet customer demand for cash during large simultaneous bank runs. Other institutions with large amounts of uninsured deposit balances could have similar risks.
The Federal Reserve and Federal Deposit Insurance Corporation (FDIC) released reports stating the collapses resulting from bank mismanagement of interest rate risk, and regulators acting to slow to follow up on previously noted concerns with the organization’s risk management actions. The failure of the three banks is estimated to have cost the FDIC $36 billion from its deposit insurance fund.
On May 11, 2023, The FDIC Board voted 3-2 to propose a 0.125% special assessment to banks with uninsured deposits over $5 billion to replenish the deposit insurance fund. The special assessment would apply beginning the first quarter of 2024 and would continue for a total of eight quarters. Earlier in the month, the FDIC proposed a potential reform to the deposit insurance system, offering three options to the FDIC deposit insurance limit. The options include (1) limited coverage, or maintaining status quo, with the option to change in the future, (2) unlimited coverage, offering full coverage for all depositors and all types of deposit accounts, or (3) a targeted approach, which means it would offer different deposit insurance coverage across account types. The FDIC Insurance Reform report was quoted as saying, “Business payment accounts are not currently defined in the structure of the deposit insurance system but must be identifiable for the viability of Targeted Coverage”.
Finally, interest rate risk oversight and stress testing requirements are currently in place for institutions $250 billion or larger. The Dodd-Frank Act (DFA) originally set the threshold at $50 billion and above to comply with the requirements. The threshold was raised during deregulations efforts in 2018 to only include institutions deemed to be “systemically important”. Analysis reports provided by the Federal Reserve and FDIC have suggested the failed banks could have been considered systemically important to the banking system. Regulatory changes in this area would be expected to take longer to become law.