Chopra calls for "automatic triggers" to curb excessive bank risk

Bloomberg News

Consumer Financial Protection Bureau Director Rohit Chopra called for regulators to create new tools for monitoring and mitigating risks in the banking system.

In a wide-ranging conversation about the ongoing bank crisis on Tuesday afternoon, Chopra said regulators should consider creating "automatic triggers to slow down some risky activity" to better keep up with the ever-faster pace of the financial sector.

He singled out the "enormous" amount of uninsured depositors at Silicon Valley Bank as a practice that could have been detected and addressed in ways beyond what the bank's supervisors — including the Federal Reserve — were able to do under current monitoring practices.

"We need to think about, should there be some guardrails or even caps on uninsured deposits that are bright lines?" Chopra said. "Should there be some automatic triggers on growth restrictions when companies cross certain lines?"

Chopra's remarks came in a webcast conversation with Washington Post business editor Lori Montgomery. 

During the event, Chopra said financial regulators can do more than they have done recently to punish bad actors but have allowed certain congressionally-endowed authorities to remain "dormant." Specifically, he said, regulators should do more to "kick the tires" on actions related to executive compensation. 

In the weeks since the collapse of Santa Clara, California-based Silicon Valley Bank and New York-based Signature Bank, the idea of enacting stricter clawback provisions has gained bipartisan traction in Congress. But Chopra said further action from lawmakers is not necessary for regulators to restrict how executives are compensated and when incentives are paid out.

"It's sitting there in the law, and the regulators just have to implement it," Chopra said, adding that many powers imbued by the Dodd-Frank Act of 2010 have not been used. "There will probably be places, maybe deposit insurance, where Congress needs to act, but a lot of this is about regulators getting to work and enforcing and administering the law as Congress wanted."

On deposit insurance, Chopra said he supports a framework that allows banks to pay a higher premium to cover deposits above the current $250,000 cutoff if they are held in accounts expressly formed for managing payroll. But, he noted, raising the insurable limit for all accounts probably is not necessary, given that the majority of households in the country have well below the current cap.

While he acknowledged that any changes to the deposit limit would have to come from Congress, Chopra suggested that it might be worth crafting policy to encourage more companies to maintain their payroll accounts at smaller, non-systemically risky institutions.

"We may even want to think of having different rules for [smaller banks], where maybe they can accept some of these higher insurance coverages," he said, "because when they fail, it's a lot easier to contain the damage to the rest of the economy, and often the impacts on consumers and businesses is much more limited and much more manageable."

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At the same time, Chopra called on regulators to better understand which banks might qualify as having systemic risk. He noted that the Fed's tailoring rules put in place in 2019 treated banks between $100 billion and $250 billion of assets as regional banks when many of them should have been deemed "domestic systemically important," and been subjected to a similar oversight regime as their global systemically important counterparts.

"What happened several years ago was, that threshold was increased and the Federal Reserve and others really undermined some of the core ways in which we make sure that these firms have enough cash on hand, can meet depositor demands, that they have enough skin in the game," he said. "And it's clear that a lot of that was a mistake, so we will need to take steps to undo that."

When asked how the CFPB planned to deal with the ever-increasing speed and accessibility of the banking system — including their influence on the rapid runs that shuttered Silicon Valley and Signature — Chopra said a forthcoming proposal aimed at accelerating the move to open banking could help mitigate the risks posed by new technology.

Under the CFPB's Open Banking Rule, banks, credit unions and other financial institutions must make customers' financial data readily available to them upon request, a provision that aims to make it easier for consumers to move freely between service providers. Chopra said he hopes that this more seamless movement of funds encourages banks to hold more liquidity, which would, in turn, help them deal with potential bank runs.

"We're seeing this all over the world, and that has real implications for how we ensure that banks and other institutions are liquid and have skin in the game," he said. "With the right oversight, they would be able to withstand those demands. But, of course, I don't think there's a way to put the genie back in the bottle. When it comes to 24/7, fast communication, it's a reality we must accept and incorporate accordingly."