U.S. regulators are quietly demanding that regional lenders shore up their liquidity planning, part of a ramp-up in efforts to tighten supervision after
The Federal Reserve has issued a slew of private warnings to lenders with assets of $100 billion to $250 billion, including Citizens Financial Group, Fifth Third Bancorp and M&T Bank, according to people with knowledge of the matter. The wide-ranging notices have touched on everything from lenders' capital and liquidity to their technology and compliance, the people said, asking not to be identified discussing confidential supervisory information.
The onslaught of such warnings — known as matters requiring attention and matters requiring immediate attention, or MRAs and MRIAs — comes as examiners look for other signs of stress in a system already strained by
These nonpublic admonitions generally require a board-level reply that includes a timeline for corrective action. For lenders on the receiving end of these MRAs and MRIAs, rectifying such actions can be costly. If left unaddressed, they can escalate into harsher public orders that can take years to resolve.
"The bigger concern is the time frame we're talking about for resolution," said Gary Bronstein, who leads the financial services team at the law firm Kilpatrick Townsend & Stockton LLP. "We're going to start seeing the supervisory staff impose tight deadlines on resolution. If banks are not resolving these issues pretty quickly, then we'll see enforcement actions."
A Fed spokesperson and representatives for Citizens, Fifth Third and M&T all declined to comment.
Regulatory Scrutiny
With their latest efforts, regulators have focused on Category IV banks, which are in the same size range as the three banks that failed this year. Supervisors had previously taken a lighter touch to regulating that category after Congress passed legislation in 2018 that raised the bar for which firms would face more stringent oversight from $50 billion to $250 billion.
The group also includes KeyCorp, Huntington Bancshares, Regions Financial and First Citizens BancShares Inc., according to the people familiar with the matter. Representatives for KeyCorp, Regions and First Citizens also declined to comment, while Huntington didn't respond to multiple requests for comment.
All U.S. lenders park a portion of their money in Treasuries and other bonds, and those assets dropped in value last year amid the Fed's aggressive push to raise interest rates. While the country's largest banks are required to recognize those unrealized losses in their regulatory capital, Category IV banks are exempt from that rule.
That's why regulators have grown increasingly concerned that a surge in these paper losses won't be adequately reflected in Category IV banks' capital ratios, which demonstrate the health of their balance sheet.
Technology Focus
Regulators are also more closely examining lenders' information-technology systems and compliance functions. In some cases, those reviews lead examiners to demand fixes for shortcomings.
In other cases, examiners have ordered lenders to ensure they have swift access to the Fed's discount window, a capability that neither Silicon Valley Bank nor Signature Bank had at the ready. That ultimately hastened their demise. They have also demanded lenders provide proof that they can easily liquidate their portfolios of available-for-sale securities if they need to raise cash in a pinch.
The existence of MRAs and MRIAs at any given firm isn't uncommon. As of June of last year, there were 157 supervisory findings across 18 firms larger than $100 billion, excluding the global systemically important banks, according to Fed data. But for regional lenders, a litany of warnings could force them to hire more workers to handle compliance and risk management. If the matter is escalated to an enforcement action, banks could face monetary penalties.
"Recent stress in the banking system shows the need for us to be vigilant as we assess and respond to risks," Barr said in May in prepared remarks for a congressional committee. "Accordingly, supervisors are redoubling their efforts to assess banks' preparedness for emerging credit, liquidity and interest-rate risks."
In the wake of Silicon Valley Bank's failure, an April report by the Fed revealed shortcomings in the central bank's supervisory process. After realizing the firm was sitting on billions in paper losses on its balance sheet, customers yanked nearly all of the bank's deposits. That forced California regulators to seize the bank.
But examiners at the Fed had uncovered those issues months earlier. As part of a series of MRAs and MRIAs they issued to Silicon Valley Bank in 2022, regulators had already ordered the bank to improve its process for tracking interest rate risks. The Fed ultimately said that supervisors responded too late and didn't demand prompt enough action from the bank.
"Supervisors did not fully appreciate the extent of the vulnerabilities as Silicon Valley Bank grew in size and complexity," the Fed said in the report. "When supervisors did identify vulnerabilities, they did not take sufficient steps to ensure that Silicon Valley Bank fixed those problems quickly enough."
Increased regulatory scrutiny isn't limited to smaller firms: Goldman Sachs Group, for its part, is hiring hundreds of staffers to fix issues raised by supervisors. Discover Financial Services, bracing for a consent order from regulators at the Federal Deposit Insurance Corp., announced the abrupt retirement of its chief executive officer and has also been hiring more personnel to deal with authorities' concerns.
"There's just been a very noticeable and heightened regulatory focus on anything liquidity, deposits or funding related," James Stevens, the co-leader of the financial services industry group at the law firm Troutman Pepper. "I can't think of ever experiencing such an acute focus on deposits, liquidity and funding risk. That's manifesting itself in a lot of rulemaking and a lot of on-site examination questions."
— With assistance from Katanga Johnson and Max Reyes
