Ahead of Hill Hearing, Regulators Say Banks ‘Resilient’ but Risks Remain

Testimony from some of the top regulators in the country ahead of a Wednesday (May 15) Capitol Hill hearing on bank oversight took note of the resilience of the banking industry in the wake of the Silicon Valley Bank (SVB) collapse of last year.

But risks remain, they say.

In prepared testimony to be offered to the House Committee on Financial Services, during a hearing titled “Oversight of Prudential Regulators,” Martin J. Gruenberg, chairman of the Federal Deposit Insurance Corp.; Michael Barr, vice chairman for supervision, board of governors of the Federal Reserve System; and Michael Hsu, acting comptroller, Office of the Comptroller of the Currency (OCC) said that banks have sufficient capital on hand, and the liquidity is a buffer against some risks.

As Barr said in his testimony, “banks continue to report capital and liquidity ratios above minimum regulatory levels. Overall asset quality remains generally sound. Lending continues to grow but has slowed from the rapid pace of 2022, reflecting decreased demand and tighter lending standards.”

But, he added, delinquency rates are rising among certain commercial real estate loans, and “credit card and auto loan delinquencies have been rising. In response to rising delinquencies, banks have increased loan loss provisions. On this basis, combined with their capital positions, the banking sector as a whole should be prepared to absorb loan losses that may materialize and continue fulfilling its vital role providing credit to households and businesses.”

The collapse of SVB figured prominently in the trio of regulators’ testimony. As Barr said, the stresses of the bank’s collapse and bank runs “highlighted the need to improve the speed, force and agility of supervision to align better with the risks, size and complexity of supervised banks.”

Lessons from Silicon Valley Bank

SVB, Signature Bank and First Republic “struggled to cope with unprecedented deposit outflows arising from a loss of confidence by their uninsured depositors,” added Barr.

In his testimony, Gruenberg said that the banking industry has maintained “resilience after a period of liquidity stress” early last year amid the events surrounding SVB. But he noted that last year a total of five banks failed, resulting in combined losses of more than $40 billion. One bank, Republic First Bank, has failed thus far in 2024.

“Reports examining the underlying causes of the 2023 failures noted that poor governance and risk management practices were contributing factors,” Gruenberg said. There’s still a need, he added, for “meaningful action” to improve governance and risk management. He noted that the 2023 bank failures “highlight the potential vulnerabilities posed by elevated reliance on uninsured deposits.”

An Eye on Technology, Too

In his written remarks, the OCC’s Hsu stated: “Banks’ relationships with third parties, including financial technology (FinTech) companies, continue to expand. The use of third parties has significant potential benefits, but poor third-party risk management can hurt consumers, weaken banks, and contribute to an unlevel playing field.”

He pointed to guidance offered jointly from the agencies that are designed to help banks manage third-party relationships.

“The OCC expects banks to approach and manage the use of artificial intelligence (AI) consistent with principles of safety, soundness and fairness,” Hsu said. “To date, banks have generally approached machine learning prudently across a range of use cases, though we are starting to see a notable increase in the number of generative AI pilots at some of the larger banks we supervise … banks must be attentive to the risk of AI-enabled fraud.”