WASHINGTON — Federal Deposit Insurance Corp. Board Vice Chair Travis Hill said Thursday that regulators should pump the brakes on
In remarks delivered to the Cato Institute Thursday, Hill said that completing a slate of ambitious new rules around capital, liquidity, living wills and other cost-intensive areas — combined with an already precarious economy and a tighter interest rate environment — could lead to unintended consequences.
"While I think that some response to the bank failures is warranted, I worry that an overreaction is underway, and that we are moving too quickly to impose a long list of new rules and expectations at a time when conditions remain precarious," Hill said. "There's a compelling case to at least try to get through the rate cycle and sort of see where we are when the dust settles, and then we can kind of take stock of what all the lessons learned are, and sort of decide which of the policy proposals are most worthwhile."
Regulators have unveiled a laundry list of new regulations including those
Often referred to as the Basel endgame proposal,
Hill
"Our capital rules for our largest banks are already meaningfully more conservative than those in other developed jurisdictions," Hill noted. "The result [of these rules] will be some combination of higher prices and less availability of products and services."
Hill had more mixed feelings about other rulemakings pending at his agency
"There were several aspects of the proposal that I would have addressed differently, but I still think the proposal was worth issuing to receive comments," he said. "The presence of long-term debt would be helpful regardless of how a bank is resolved."
But he disagreed with the FDIC's recent proposal to revamp resolution reporting for banks.
"While resolution plans can provide the FDIC with some useful information and certain aspects of the proposed changes might be helpful, I think the proposal could have better focus on key areas of resolution planning, such as maximizing the likelihood of a weekend sale in the event of a regional bank failure," he noted.
"Rather than make the merger process more difficult, we should instead try to address some of the underlying causes of consolidation, which includes the ever-rising cost of compliance, the steep challenges associated with technology adoption and the dramatic decline of de novo activity since the 2008 financial crisis," he said. "Additionally, the current merger application process is in many cases too long and too opaque."
Hill expressed concern about potential changes to liquidity rules for large banks, including altering the liquidity coverage ratio, or LCR — a cache of high quality liquid assets that regulators have required from banks since the 2008 crisis, and which can be sold or monetized in times of stress. Hill said the recent spate of bank failures showed that banks in trouble tend to leverage their high quality liquid assets rather than sell them outright — an aspect of the LCR that has not been sufficiently considered.
"I understand the impulse to reconsider aspects of our liquidity rules in light of lessons learned but if we do, we should do so holistically," he said. "If we're going to change outflow assumptions for uninsured deposits to reflect the possibility that they may run more quickly than previously expected, we should also consider that in such an event, banks are unlikely to fire-sale their stockpile of high quality liquid assets in a matter of hours, and instead will more likely pledge all assets available to borrow against."
He said he generally agreed with reexamining supervisory practices like monitoring interest rate risk, concentrations of uninsured deposits, liquidity risk management and contingency funding, but that ultimately it is paramount that supervisors step up their game.
"Bank supervision cannot and should not prevent all bank failures," he said. "As we consider ways to ensure timely remediation of supervisory issues, supervisors also need to consider ways to, first, complete exams and communicate findings in a more timely way, and, second, better prioritize core safety and soundness risks."
Hill also disagreed with the FDIC's focus on
"Never once have I ever heard a bank supervisor or FDIC staff member mention a climate event as causing stress at a particular bank, [and] there is no record of banks ever failing because of climate-related events," he said. "Banks often benefit in the aftermath as demand for loans grows, recovery funds flow into the community and economic activity rebounds."
He went on to indicate that, much like the reaction to higher capital, banks would likely react to climate risk guidance by retracting credit or charging low- and moderate-income consumers and businesses more for loans. Regulators have declared weather-related
Hill's hypothesis that higher capital cushions at banks reduce lending is
FDIC Chairman Martin Gruenberg echoed the idea that stronger cushions of capital against losses ultimately bolster a bank's long-term ability to provide services through hard times and would only cause a modest reduction in banks' short-term profitability, since most banks already have adequate capital to meet the rules.
"The majority of banks that would be subject to the proposed rule currently have enough capital to meet the proposed requirements," Gruenberg noted when the Basel III