Regulatory Note — SVB V – HFSC Regulatory Reform Bill
THIS IS THE FIFTH IN A SERIES OF REGULATORY NOTES ON THE SILICON VALLEY BANK, SIGNATURE BANK, AND FIRST REPUBLIC BANK FAILURES AND THEIR CONSEQUENCES. THE PREVIOUS FOUR NOTES ARE AVAILABLE ON THE BLOG.
On May 24, 2023, the House Financial Services Committee completed its markup of reform legislation relating to the failures of Silicon Valley Bank and Signature Bank and approved H.R. 3556, the “Increasing Financial Regulatory Accountability and Transparency Act.” The bill covers the following:
Systemic risk interventions. When an insured depository institution or its holding company (collectively, “banks”) poses a threat to financial stability, federal regulators may intervene under any of six different statutory provisions to provide financial support. H.R. 3556 generally would require prior notice to the House Committee on Financial Services and the Senate Banking Committee (together, the “Committees”) of any such intervention and would impose other reporting requirements. The bill also contains a handful of modest substantive amendments to the agencies’ powers. Because the proposed amendments are not identical across the programs, the Appendix to this Note summarizes the proposed changes to each program.
“Grave threat” to financial stability. Under section 121 of the Dodd-Frank Act, the Fed may determine that a bank holding company with assets of $250 billion or more or a systemically risk nonbank financial company poses a “grave threat” to financial stability. If so, and with the affirmative vote of two-thirds of the Financial Stability Oversight Council (“FSOC”), the Fed may restrict the business of the company in many ways and, in some cases, require the company to sell off assets. H.R. 3556 would require the Fed to give the Committees 60 days’ advance notice before imposing any such restrictions.
FSOC. Title III of H.R. 3556 would change the workings of FSOC in two respects. First, a second independent member would be added to the Council whose sole qualification is that he or she is not of the same political party as the President. Second, Congress would have the authority through a joint resolution to overrule FSOC’s designation of a nonbank financial company as systemically risky. FSOC would also be restricted in the factors it could use in making such determinations and would lose its authority to make emergency exceptions from the current and proposed timing requirements for such designations.
FSOC would no longer have authority to recommend heightened prudential standards to the Fed although it would retain the authority to make certain recommendations to the primary financial regulatory agencies. Elsewhere, the bill would require advance notice to Congress of meetings, directives to the Office of Financial Research (“OFR”) to collect information from individual banking firms, and requests to the Fed for back-up examinations of nonbank financial companies. FSOC would also have to notify the Committees of recommendations to the Fed regarding systemically risky nonbank financial companies. Title III provides additionally for other notices to the Committees, reports, and requests for information from the Committees. GAO would be required to conduct an annual audit of FSOC.
OFR. OFR would be required to notify the Committees, often in advance, of a wide range of its activities. Prior notice would be necessary for all research projects, subpoenas to financial companies (waiting period of 60 days after notifying the Committees), assistance to or information sharing with other government agencies, and requiring periodic reports from financial companies.
The Fed’s Vice Chairman for Supervision. The bill would require any future Vice Chairman for Supervision at the Fed to have “demonstrated primary experience working in, or supervising, insured depository institutions, bank holding companies, or savings and loan holding companies.” H.R. 3556 also would make explicit the full Federal Reserve Board’s oversight of the work of the Vice Chairman. The Vice Chairman currently has authority to oversee the supervision and regulation of Fed-regulated institutions and is charged with making supervisory recommendations to the full board, powers that would not be affected by H.R. 3556. The bill would, however, make clear that the full Board may exercise its own oversight and control of the Vice Chairman as the Board deems necessary and appropriate. In addition, with respect to the Vice Chairman’s recommendations, the bill would require “ample and sufficient time” for full Board review before a recommendation becomes public.
Testimony and reports to Congress. H.R. 3556 would require two forms of semi- annual reports and accompanying testimony from each of the federal banking agencies and the NCUA on the supervision and regulation of banks or credit unions under their jurisdiction. (With respect to the Fed, the Chairman already is subject to a semi-annual testimony requirement.) Public reports would include aggregate data on examination ratings (including ratings over the previous three years), outstanding material supervisory determinations, changes in such determinations over the preceding five years, and formal and informal enforcement actions. The agencies also would be required to submit confidential reports to the chairs and ranking members of each Committee that identify each supervised depository institution with less than satisfactory examination or inspection ratings and each institution with an active formal or informal enforcement action and the status of each provision of such an action.