The Fed is proposing to extend tighter rules to smaller banks—those with $100 billion to $700 billion in assets—bringing them in line with the regulatory restrictions on large banks.
The recent review of the supervision and regulation of Silicon Valley Bank provides an early look at future bank regulation. It makes it clear that tighter regulation is coming, with particular focus on managing interest rate and liquidity risk, which will affect both sides of a bank’s balance sheet. On the liabilities side, banks would need more long-term liabilities that can be converted into equity in the event of stress, locking in a higher cost of capital. On the assets side, banks would need to hold sufficient high-quality liquid assets (such as cash and U.S. equities) to fund the daily cash outflows in a hypothetical 30-day scenario. The pressure on both sides of the balance sheet suggests a squeeze on margins and profitability.
It’s worth highlighting that there is uncertainty about when such regulatory changes will go into effect. In our view, at least some of these changes are unlikely to require legislation and thus face fewer hurdles. The timing of implementation depends on when they are proposed and the standard notice and comment periods in the rule-making process. That said, markets are forward-looking and will likely move in anticipation of these regulatory changes.