Fed May Reverse Rules that Masked Losses on SVB’s Securities

U.S. Federal Reserve is considering ending an exemption that has allowed certain midsize banks to conceal losses on securities they hold, the Wall Street Journal reported on Friday, signaling a retightening of bank oversight is in the cards following last month’s failures of Silicon Valley Bank and Signature Bank.

If approved, the move spearheaded by Fed Vice Chairman for Supervision Michael Barr would reverse a relaxing of oversight granted to some regional banks by the Fed in 2019 under Barr’s predecessor Randal Quarles.

The exemption at issue allows midsized banks to not disclose unrealized losses on their holdings of securities designated as “available for sale,” which has enabled them to inflate the amount of capital they disclose for regulatory reasons, the report said, citing people familiar with matter.

SVB’s unrealized losses on securities such as Treasuries and mortgage-backed securities – arising as a result of the Fed’s aggressive interest rate increases over the past year that undercut their value – were a key factor in its sudden collapse last month.

A Fed spokesperson declined to comment.

Reuters reported in March that the Fed is considering tougher rules and oversight for midsize banks similar in size to SVB. A review of the $209 billion bank’s failure being conducted by Barr could lead to strengthened rules on banks in the $100 billion to $250 billion range, the source told Reuters.

Barr is leading a review of the Fed’s oversight of SVB, with the results of that review expected to be released by May 1. The Federal Deposit Insurance Corp is also expected to release its preliminary review of the failures that same day.

In hearings last month, Barr told lawmakers that supervisors had repeatedly identified risks to SVB, beginning in 2021, and even took steps to restrict its growth in 2022 because they went unaddressed.

Barr said SVB’s collapse was a “textbook case of mismanagement,” citing the firm’s concentrated business model, exceedingly fast growth, failure to manage its interest rate risk, and reliance on uninsured deposits.

Regulators have vowed to review their rules and procedures after the two failures while insisting the overall system remains sound. Barr had welcomed external reviews of regulators’ work and expects the Fed to be “accountable” for any shortcomings that are unearthed.